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Policy Regime Change against Chronic Deflation? Policy option under long-term liquidity trap

  • Kozo Ueda
  • Yoshiyuki Nakazono
  • Ippei Fujiwara

The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthlysurvey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?

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File URL: https://crawford.anu.edu.au/pdf/ajrc/wpapers/2014/201402.pdf
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Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series AJRC Working Papers with number 1402.

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Length: 41 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:csg:ajrcwp:1402
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  1. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Avoiding Liquidity Traps," Departmental Working Papers 199925, Rutgers University, Department of Economics.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  3. Joshua K. Hausman & Johannes F. Wieland, 2014. "Abenomics: Preliminary Analysis and Outlook," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 1-76.
  4. Gauti B. Eggertsson, 2008. "Great Expectations and the End of the Depression," American Economic Review, American Economic Association, vol. 98(4), pages 1476-1516, September.
  5. Yoshiyuki Nakazono & Kozo Ueda, 2011. "Policy Commitment and Market Expectations: Lessons Learned from Survey Based Evidence under Japan's Quantitative Easing Policy," IMES Discussion Paper Series 11-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Fujiwara, Ippei, 2007. "Is there a direct effect of money?: Money's role in an estimated monetary business cycle model of the Japanese economy," Japan and the World Economy, Elsevier, vol. 19(3), pages 329-337, August.
  7. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  8. Fujiki, Hiroshi & Shiratsuka, Shigenori, 2002. "Policy Duration Effect under the Zero Interest Rate Policy in 1999-2000: Evidence from Japan's Money Market Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(1), pages 1-31, January.
  9. Jinill Kim & Seth Pruitt, 2013. "Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero," CAMA Working Papers 2013-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Gauti Eggertsson & Bulat Gafarov & Saroj Bhatarai, 2014. "Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing," 2014 Meeting Papers 1292, Society for Economic Dynamics.
  11. Koichiro Kamada & Tomohiro Sugo, 2006. "Evaluating Japanese Monetary Policy under the Non-negativity Constraint on Nominal Short-term Interest Rates," Bank of Japan Working Paper Series 06-E-17, Bank of Japan.
  12. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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