Must-Read: Ben Bernanke: Some reflections on Japanese monetary policy

Must-Read: This first part reads as though Ben Bernanke is not talking just about the Bank of Japan, but rather about the Federal Reserve as well—or perhaps more about the Federal Reserve. The argument against a 4%/year inflation target—or a price level-path target with catchup—is that there is value in keeping inflation too low to be salient in people’s decisions. But that benefit is uncertain and speculative. The costs of being unable to use monetary policy to offset a negative demand shock are very concrete and real, and very dire indeed:

Ben Bernanke: Some reflections on Japanese monetary policy: “The BOJ shouldn’t stop its determined pursuit of its inflation target…

…Getting inflation and interest rates higher will promote economic stability by increasing the BOJ’s ability to respond to future recessions…. Kuroda’s program of “qualitative and quantitative easing” has had important benefits, including higher inflation and nominal GDP growth and tighter labor markets. Recent changes to the BOJ’s framework will make it more sustainable….

What tools remain if current policies are not enough? The scope for significant further easing by Japanese monetary authorities on their own seems limited, as interest rates are near zero for government bonds even at long maturities and raising inflation expectations—a way to lower real interest rates—has proved difficult. If more stimulus is needed, the most promising direction would be through fiscal and monetary cooperation, in which the BOJ agrees to temporarily raise its inflation target as needed to offset the effects of new fiscal spending or tax cuts on the debt-to-GDP ratio…


Brad DeLong
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