Fall 2015 Brookings Panel on Economic Activity Weblogging: Abenomics:
Fall 2015 BPEA 10:45 AM Fr: Hausman and Wieland once again depress me:
Our analysis of Abenomics, and monetary policy in particular, suggests that its real effects so far have been small despite intermediate indicators, such as the real interest rate and the real exchange rate, moving in an expansionary direction…
My reading of the Great Depression era–FDR’s New Deal, Neville Chamberlain’s announcement that it was the policy of HMG to reverse the deflation that had occurred since 1929, Takahashi Korekiyo in Japan before his very untimely murder by militarist-fascist captains and majors–had convinced me that expectational effects were a thing. It was pretty clear from 1979-1984 that at the worker and firm level expectations of inflation and deflation were likely to be adaptive and backward looking. But the effects of Roosevelt’s, Chamberlain’s, and Takahashi’s policies in the 1930s gave me confidence that the announcement effect of Abenomics stood a very good chance of reversing Japan’s deflation and spurring a strong recovery–because expectations relevant for financial markets were forward-looking, and reasonable forecasts that could be affected by credible policy announcements.
Can I still believe that?
Hausman and Wieland:
We documented in sections 2.1 and 2.2 that most indicators of inflation expectations in Japan remain well below 2%, and we argued that this likely reflected imperfect credibility. One possible explanation for this lack of credibility, discussed at length in Hausman and Wieland (2014), is that observers doubt the political will to continue large-scale quantitative easing. Another possibility is that observers doubt the effectiveness of quantitative easing. Insofar as there are doubts about the political will to achieve to 2% inflation, it was unfortunate that the Bank of Japan’s expansion of quantitative easing in October 2014 passed with only a 5 to 4 vote….
Given that quantitative easing has not (yet) produced actual or expected 2% inflation, the Bank of Japan could consider following Denmark, the Eurozone, and Switzerland in paying negative nominal interest rates on reserves…. Negative nominal rates are only one of many alternative policies…. For instance, as discussed by Svensson (2003), the Bank of Japan could deliberately weaken the yen and peg the yen at a weak value. While net exports have not responded strongly to the recent yen depreciation, it is plausible that a peg could increase these effects by persuading firms of the weak yen’s permanence. Such a peg might also improve the credibility of the 2% inflation target. A practical difficulty is that exchange rate policy falls within the scope of the Ministry of Finance rather than the Bank of Japan, so that more explicit cooperation between them would be required.
We are hesitant to comment on more non-standard proposals, such as money-financed government expenditures or money-financed fiscal transfers. Our analysis above suggests uncertainty about what macroeconomic model applies to Japan. This implies uncertainty about how alternative policies would affect inflation and output.