Chapter

Financial Strains and the Zero Lower Bound

Edited by Mitsuhiro Fukao

in Monetary Policy with Very Low Inflation in the Pacific Rim

Published by University of Chicago Press

Published in print October 2006 | ISBN: 9780226378978
Published online February 2013 | e-ISBN: 9780226379012 | DOI: http://dx.doi.org/10.7208/chicago/9780226379012.003.0006
Financial Strains and the Zero Lower Bound

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This chapter outlines the causes of the Japanese deflation. It evaluates the long-run Phillips curve equation using the gross domestic product (GDP) deflator and the estimated GDP gap. The estimated GDP gap figures and the Phillips curve show that the widening GDP gap resulted in the acceleration of deflation from 1995 to 2003. This indicates that the aggregate-demand shocks were more significant than the aggregate-supply shocks as a cause of persistent deflation in Japan. An increase in the average lending rate is likely to depress the Japanese economy and will aggravate the deflation. As the deflation gradually accelerates, the real interest rates are rising and conventional monetary-policy tools have lost effectiveness. The Gesell tax can be regarded as a substitute for inflation tax on government liabilities. But this tax has a possible negative impact on the credit rating of the Japanese government.

Keywords: Japanese deflation; Phillips curve equation; gross domestic product; aggregate-demand shocks; aggregate-supply shocks; Japan; Japanese economy; interest rates; Gesell tax; inflation tax

Chapter.  10265 words.  Illustrated.

Subjects: Business and Management

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