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Raising an Inflation Target : The Japanese Experience with Abenomics

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Abstract

This paper draws from Japan?s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in Japan since late 2012. Our analysis indicates that Japan has made some progress towards overcoming deflation, but further measures are needed to raise inflation to 2 percent in a stable manner.

Suggested Citation

  • Andrea De Michelis & Matteo Iacoviello, 2016. "Raising an Inflation Target : The Japanese Experience with Abenomics," International Finance Discussion Papers 1168, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1168
    DOI: 10.17016/IFDP.2016.1168
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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