Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policy-making under Uncertainty

Ippei Fujiwara, Naoko Hara, Naohisa Hirakata, Takeshi Kimura and Shinichiro Watanabe
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Shinichiro Watanabe: Bank of Japan (Corresponding author, e-mail: takeshi.kimura@boj.or.jp)

No 07-E-09, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Focusing on policy-making under uncertainty, we analyze the Bank of Japan's monetary policy in the early 1990s when the bubble economy collapsed. Conducting stochastic simulations with a large-scale macroeconomic model of the Japanese economy, we find that the BOJ's monetary policy at that time was essentially optimal under uncertainty about the policy multiplier. On the other hand, we also find that the BOJ's policy was not optimal under uncertainty about inflation dynamics, and that a more aggressive policy response than actually implemented would have been needed. Thus, optimal monetary policy differs greatly depending upon which type of uncertainty is emphasized. Taking into account the fact that overcoming deflation became an important issue from the latter 1990s, it is possible to argue that during the early 1990s the BOJ should have placed greater emphasis on uncertainty about inflation dynamics and implemented a more aggressive monetary policy. The result from a counter-factual simulation indicates that the inflation rate and the real growth rate would have been higher to some extent if the BOJ had implemented a more accommodative policy during the early 1990s. However, the simulation result also suggests that the effects would have been limited, and that an accommodative monetary policy itself would not have changed the overall image of the prolonged stagnation of the Japanese economy during the 1990s.

Keywords: Collapse of the Bubble Economy; Monetary Policy; Uncertainty (search for similar items in EconPapers)
JEL-codes: E17 E52 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Journal Article: Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policymaking under Uncertainty (2007)
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