The mckinnonohno thesis accepts that japan finds

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Unformatted text preview: ggressive monetary expansion, going well beyond the already substantial relaxation of the recent past, would stimulate demand to an extent sufficient to overcome the present stagnation and to validate the inflation itself. The McKinnon–Ohno thesis accepts that Japan finds itself in a liquidity trap, but differs from that of Krugman in that it lays the blame for positive real interest rates not on the credibility of the Bank of 9 Japan’s low inflation policy, but on the expectation of future currency appreciations. The two authors argue that the past history of USA–Japan trade conflicts has set the yen on a relentless upward path and that this trend is now incorporated in expectations (as shown by the continuing large uncovered interest-rate differential between the two countries). Continuing currency appreciations, imposed by foreign pressures, lead to falling Japanese tradable prices, a process which is then validated by the Central Bank’s orthodox stance. The policy recommendation which stems from this analysis is not that of inflating and trying to depreciate the currency, but that of creating a credible expectation of future exchange-rate stability. Once ‘the fear of an...
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