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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