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The Japanese Deflation: Has It Had Real Effects? Could It Have Been Avoided?


  • Claudio Morana



Has deflation contributed to the long lasting stagnation of the Japanese economy? Could the Bank of Japan have stopped deflation by implementing a more expansionary monetary policy? Our tentative answers are probably not to the first question, and probably yes to the second question. We find that the total cost of deflation over the period 1995-2003 has been close to a 1.1% rate of lost GDP. Yet, on the basis of statistical significance and robustness to specification choices, this evidence is not compelling. On the other hand, the estimated positive linkage between nominal base money growth and inflation is significant and robust, even given current economic conditions. However, in order to be inflationary, monetary policy should have been more expansionary than what actually observed, even since the launch of the quantitative easing in 2001.

Suggested Citation

  • Claudio Morana, 2004. "The Japanese Deflation: Has It Had Real Effects? Could It Have Been Avoided?," ICER Working Papers 29-2004, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:29-2004

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    Cited by:

    1. Fabio C. Bagliano & Claudio Morana, 2012. "Macro-Finance Interactions in the US: A Global Perspective," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. repec:ipg:wpaper:2014-334 is not listed on IDEAS
    3. Morana, Claudio & Beltratti, Andrea, 2008. "Comovements in international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 31-45, February.
    4. repec:ipg:wpaper:2014-065 is not listed on IDEAS
    5. Shimasawa, Manabu & Sadahiro, Akira, 2009. "Policy reform and optimal inflation rate for Japan in computable OLG economy," Economic Modelling, Elsevier, vol. 26(2), pages 379-384, March.

    More about this item


    deflation; monetary policy; Friedman's rule; Japan; generalised flexible least squares; time-varying parameter VAR; thick modelling;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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