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

Kozo Ueda, Yoshiyuki Nakazono and Ippei Fujiwara

AJRC Working Papers from Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University

Abstract: 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?

JEL-codes: E47 E50 E60 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: Policy regime change against chronic deflation? Policy option under a long-term liquidity trap (2015) Downloads
Working Paper: Policy regime change against chronic deflation? Policy option under a long-term liquidity trap (2015) Downloads
Working Paper: Policy Regime Change against Chronic Deflation? Policy option under a long-term liquidity trap (2014) Downloads
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