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.
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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