They have almost certainly avoided an even deeper

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Unformatted text preview: . Expansionary monetary policies, accompanied by periodic fiscal expansions, have been followed for a number of years, yet the effects of these policies have been limited. They have almost certainly avoided an even deeper crisis, but they have been unable to set the economy on a self-sustaining growth path. Monetary policy has driven nominal short-term interest rates to virtually zero and there would seem to be little else that it can now do. Fiscal policy, for its part, has driven publicsector debt to levels that many appear to view as unsustainable. This, too, severely constrains its operations. Thus, Japan may have fallen into the throes of a Keynesian ‘liquidity trap’, in which traditional monetary policy becomes impotent, and may also be closer than most industrialized economies to the neo-Ricardian ‘debt neutrality’ theorem (Barro, 1974) in which fiscal policy becomes (almost) impotent. Paradoxically, two diametrically opposed views of how economies work (Keynesian and neoclassical) seem to have come together in denying Japan a policy-led solution to its woes. Yet, there is no shortage of alternative interpretations, or of policy prescriptions. At the risk of oversimplification, two major views have been put forward as to what the policy-makers should do to try and reinvigorate the economy: (i) for those who do not think that Japan’s potential has...
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