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

Claudio Morana

ICER Working Papers from ICER - International Centre for Economic Research

Abstract: 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.

Keywords: deflation; monetary policy; Friedman's rule; Japan; generalised flexible least squares; time-varying parameter VAR; thick modelling (search for similar items in EconPapers)
JEL-codes: C32 E50 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2004-11
New Economics Papers: this item is included in nep-mac
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Journal Article: The Japanese deflation: has it had real effects? Could it have been avoided? (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpicer:29-2004

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