If this policy switch is credible real interest rates

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Unformatted text preview: e policy recommendation is then for the Bank of Japan to convince public opinion that it will follow an ‘irresponsible’ policy of pursuing a positive rate of inflation for a prolonged period of time. If this policy switch is credible, real interest rates (deflated by future inflationary expectations) would, indeed, turn negative and the economy would finally revive. While attractive at first sight, there would seem to be a number of difficulties associated with this pro- posal. The first, and most obvious one, is to persuade the Bank of Japan to abandon its present mandate to ensure price stability. Just a cursory knowledge of central bankers’ psychology shows the magnitude of the task. After all, in mid-2000, while the economy was still stagnating, the Bank of Japan’s governor was calling for interest-rate increases. But even if the monetary authorities could be persuaded to embrace a pro-inflationary stance, it is difficult to see how this conversion on its own could be effective in spurring demand. Experience so far of policy switches that appeared very credible, has shown that these may influence behaviour on financial markets, but have very little impact on labour markets.8 Admittedly, product markets may respond somewhat more rapidly to an announcemen...
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This note was uploaded on 02/03/2014 for the course ECON 204 taught by Professor Devero during the Summer '13 term at American University of Sharjah.

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