Must-Read: Noah Smith: Japan Shuts Down Its Monetary Lab

Must-Read: Noah Smith: Japan Shuts Down Its Monetary Lab: “People know that the central bank can break its promises at any time…

…Even… rule[s] can be amended at any time. The bank might change its mind…. Or the people in charge of the central bank might simply be replaced with new, more hawkish leaders. Since the central bank can’t make believable long-term promises, the effects of forward guidance and bold rhetoric are limited in reality, even if they could work in an ideal world. As for quantitative easing, it has run into its own practical hurdles…. Eventually, it starts to affect corporate governance in ways that are well outside the scope of any macroeconomic model. And since companies and consumers knew that the buying binge was temporary, that probably limited its effectiveness.

So we’re seeing that even if inflationary monetary policy works fine in theory… reality just doesn’t work the way the models assume…. If Japan is out of the monetary easing game, other countries will doubtless follow. The era of bold monetary policy experimentation that began with the global financial crisis is now drawing to a close. More and more, economic policy makers will look to fiscal initiatives and to deeper structural reforms to boost growth and stop deflation.