Japan's Deflation and the Feasibility of Negative Interest Rates

Stephen J. Davies
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Stephen J. Davies: Kobe University

Kobe Economic & Business Review, 2003, vol. 47, 93-115

Abstract: Japan's central economic problem is that interest rates are much too high, so that aggregate demand is too low. gStructural reforms h will increase supply but not deal with the shortage of demand. It is generally assumed that ginterest rates cannot be negative" and that therefore alternative techniques have to be used to ease monetary policy when interest rates are already close to zero. This paper discusses three existing ideas for achieving negative interest rates: Gesell's "stamp scrip" and two recent proposals. It argues that negative interest rates can be achieved without the cost involved in these existing proposals. All that is needed is to break the link between cash and the unit of account: a 1,000-yen note would no longer be worth 1,000 yen. Alternatively, cash can be replaced with electronic legal tender, subject to a negative interest rate.

Keywords: deflation; negative interest rates (search for similar items in EconPapers)
JEL-codes: B59 E21 E31 E42 E50 E52 (search for similar items in EconPapers)
Date: 2003
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