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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.
- Summer '13