Departmental Bulletin Paper On Self-fulfilling Deterioration in anEconomy in the AccommodativeMonetary Policy Regime

KUROKI, Yoshihiro  ,  黒木, 祥弘

30 ( 2 )  , pp.1 - 41 , 2015-09-30 , 千葉大学経済学会 , チバ ダイガク ケイザイ ガッカイ , Economics Association for Chiba University
Unfortunately, Japan has had first-hand experience to confirm thatan inflation accommodating policy assists self-deterioration in an economy.Unlike previous contributions, we find that the Bank of Japan waspoorly committed to inflation stabilization for our full sample period of1979-97. Although the Bank had aggressively stabilized inflation duringthe period of Governor Maekawa(1979-84), it accommodated inflationin a short-sighted manner and emphasized output control after1985. In particular, we identify that the Bank strengthened its accommodativepolicy stance during the bubble period(1987-89)and thedeflation period(1993-97). We present empirical evidence that suchan accommodative policy regime could be a sustainable force of theboom-bust cycle in the late 1980s and the successive persistent deflation.We believe that the experience of the Bank of Japan has importantimplications for other contemporary central banks.

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