What Does the Failure of the Situation to Develop Necessarily to Abenomics’ Advantage Mean for Macroeconomics?

As I said, 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’s policies in Japan before his very untimely murder by militarist-fascist captains and majors–had convinced me that expectational effects were a thing. Thus I anticipated that Abenomics was likely to be a substantial huge success. 1979-1984 had taught us the limits of the expectations channel: that at the worker- and the manager-level expectations of inflation and deflation were likely to be adaptive and backward-looking. But Roosevelt, Chamberlain, and Takahashi in the 1930s gave me confidence in the expectations channel as far as money demand and investment were concerned. Thus I believed that the announcement effect of Abenomics stood a very good chance of working very well indeed.

I expected it to (1) reverse Japan’s deflation, (2) raise asset prices substantially, (3) bring price inflation and inflation expectations into line with its targets, and (4) spur a strong recovery. Why? Because I believed expectations relevant for financial markets were forward-looking, and reasonable forecasts that could be affected by credible policy announcements. (1) and (2) have happened. (3) and (4) have not.

Slides from Adam Posen’s Discussion of Hausman and Wieland’s Abenomics update:

Does Abenomics Support or Discredit Standard [New-Keynesian] Macro?

• The forward-looking expectations/crediblity centered view of monetary policy comes off poorly

  • Ball and others had warned us that you really need real growth and wage rises to get inflation up
  • Combo of exchange rate movement and the BOJ program should have been “credible” by any standard
  • May be a little unfair, in that the combination of labor market changes and global forces can account for a rather large share of the ‘shortfall’ in inflation (i.e., core targeting was more successful)
  • Hidden surprise is that unlike 1990s/early 2000s, clean banks and balance sheets, still no effect
  • Remains the issue of response to shocks (which I agree is the proper definition of anchoring)

• Fiscal policy comes closer to being as expected, at least in the short-run

  • Multipliers on fiscal policy not unexpectedly large, but persistence of shock was as surprise
  • The authors’ showing the uniformity of consumption impact across ages/credit status may just illustrate the (sole) relative importance of liquidity constraints which are largely absent in Japan today
  • Much more troubling with respect to fiscal theories of price level, debt-sustainability, and distinctions of permanent/temporary tax impacts

• Three surprises/challenges for me with respect to overall policy assessment

  • Hidden surprise is that unlike 1990s/early 2000s, clean banks and balance sheets, still limited effect
  • Should we stop talking about credbility?–if forward-looking matters, shouldn’t there be Ricardian effects of fiscal policy and/or a stock market response to VAT hike?
  • If labor flexibility and shareholder rights-enhancing reforms don’t work when tried, does this mean that structural reform is overrated?

What Are the Puzzles Abenomics Presents to Macro?

• Remember, the message of Japan 1990-2003 is that policy worked as expected [by simple IS-LM]

  • Has something changed?
  • Japan is more open and more market-oriented now than in 2003 which goes other way

• Underscores the misleading emphasis on (simple? or just flexible?) forward-looking expectations–even amongst well-informed businesses and investors

• Challenges us to further examine the global forces (still tbd) behind inflation levels and consumption/savings trends–especially since not simple RBC looking either

• Highlights the puzzles in trade balance and exchange rate pass-through:

  • How can depreciation have large effects on exports volumes but not imports?
  • How can depreciation affect a huge chunk of the economy and not (first-round) affect general inflation?

• Why is low inflation so inertial not just sticky?

• Are we having to take more literally falling in and out of two states of the world–between recession-land and boom-world?

Those are Adam Posen’s take-aways from the Abenomics experience so far. Are they right?

I will have to think about this for quite a while…