The Great Recession: Lessons for Macroeconomic Policy from Japan

Abstract

SINCE THE PERSISTENCE OF Japan's economic stagnation first became apparent, the Japanese government has been offered a flood of advice from macroeconomic policy analysis. Much of this advice emanated from the official sector, most prominently from the U.S. Treasury and the International Monetary Fund (IMF), but a host of academics were likewise generous in their recommendations. 1 Yet both the degree to which Japan has followed this advice and the effects of the macroeconomic policies undertaken remain in dispute. Economic commentators and other observers of Japan have split over whether standard Keynesian policies were tried and failed, whether the policies implemented had the expected effects but were offset by other factors, or whether some of the recommended policies (monetary expansion, in particular) never were seriously tried at all. 93

The difficulty of discerning what’s too tight: Taylor rules and Japanese monetary policy

“…policy rule is said to be "history dependent." 27 One method particularly well-suited to this sort of application is that of Kuttner (1994), applied with modifications to Japan in Posen (1998) and Kuttner and Posen (2001b). Bernanke and Gertler (1999) 1988-90, too loose; 1992-96, too tight.…”

Optimal institutional design when there is a zero lower bound on interest rates

“…In the context of a liquidity trap, the optimal policy recommendation might, therefore, turn out to be one that lets the economy fall into a liquidity trap with some probability rather than completely eliminating the possibility of a liquidity trap. 9 5 See, for instance, Posen (1998), Kuttner and Posen (2001), Iwamura et al (2005) and Ball (2005). 6 See the working paper version of the paper, Dhami and al-Nowaihi (2007), for the details.…”

“…6 See the working paper version of the paper, Dhami and al-Nowaihi (2007), for the details. 7 See, for instance, Posen (1998), Kuttner and Posen (2001) and Eggertsson (2006b). 8 See, for instance, the empirical evidence in Iwamura et al (2005) and Eggertsson (2006b).…”

“…For instance, see Sims (2003). 24 To simplify the dynamic game-theoretic analysis Dixit-Lambertini follow the tradition, established in the time-inconsistency literature 25 , of abstracting from structural dynamic issues, notably, capital formation, the term structure of interest rates, exchange rate policy and the …nancing of the stabilization component of …scal policy. Concentrating on the aggregate demand consequences of investment expenditure, but abstracting from its 23 However, our model has the following di¤erences from the Dixit-Lambertini model.…”

Fiscal Consolidation Contrasting Strategies & Lessons from International Experiences

“…On the Japanese experience and the lessons it offers see also: Ahearne et al 2002, Buiter 2003b. Kregel 2000, Krugman 1998, Kuttner and Posen 2001, Palley 2000, and Posen 2002 18 for much of the Japanese mess. 18 While some would see the key blunder in creating the "bubble economy" of the eighties, others emphasize the bank's too sluggish response, at first to the bubble's burst and emerging slump in the early 1990s and then, especially, since the onset of deflation.…”