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Raising an Inflation Target: The Japanese Experience with Abenomics

Andrea De Michelis () and Matteo Iacoviello ()

No 1168, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Abenomics; Credibility; Deflation; Inflation target; Japan; Monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E47 E52 E58 F31 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1168

DOI: 10.17016/IFDP.2016.1168

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