In one interpretation it is the expectation of

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Unformatted text preview: that this problem can be eliminated. (i) Changing Price Expectations The view that pessimistic expectations are depressing Japanese private demand has been most forcefully put outside Japan. In one interpretation, it is the expectation of continuing price deflation that keeps the real interest rate in positive territory and prevents the needed expansion (Krugman, 1998). In an alternative view, it is the expectation that the yen will continually appreciate that inhibits higher spending (McKinnon and Ohno, 1997, 1999). The Krugman contention is that monetary policy is ineffective in today’s Japan for two main reasons. On the one hand, the Central Bank has credibly committed itself to a policy of very low inflation (in fact, this year’s inflation is negative), so that, even with virtually zero nominal interest rates, the real rate of interest remains positive. On the other hand, the population, worried by future demographic (and pension) projections, has drastically reduced its rate of time preference, so that only a negative real interest rate would generate increases in demand. Th...
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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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