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Home , Irving Fisher, Lawrence Klein

【Grant-in-Aid for Scientific Research(S)】 Humanities and Social Sciences (Social sciences )

Title of Project： Understanding Persistent in Japan

Tsutomu Watanabe ( The University of Tokyo, Graduate School of , Professor )

Research Area：Economics Keyword：, deflation, 【Purpose and Background of the Research】 There are two strands of research regarding the The Japanese has been in a interaction between problems in the monetary over the last ten years. Since the mid-1990s, the and real sides of the economy. The first is based Bank of Japan has cut the policy rate several on the idea that a decline in the natural rate of times until the rate finally reached the zero lower below zero causes a liquidity trap, which bound in 2001. At the same time, consumer goes back to in the 1940s and was has been below zero since the mid-1990s, revived more recently by Krugman (1998). Recent indicating the presence of persistent deflation. papers based on this idea include Jung, Teranishi, Importantly, similar phenomena are now and Watanabe (2005), which characterizes the beginning to take shape in the and optimal policy response to a negative natural rate European countries. The purpose of this project is of interest. However, in these papers, the natural to understand the mechanisms behind the rate of interest is assumed to be an exogenous liquidity trap, with a special focus on the variable, so that it is next to impossible for them interaction between problems in the monetary side to consider the interaction between problems in of the economy, such as deflation and the zero the real and monetary sides of the economy. In , and in the real side of the economy, this project, we will depart from previous studies such as low growth. We will conduct by considering an environment in which the cross country analyses with the Japanese economy natural rate of interest is endogenously as the benchmark. determined reflecting, for example, productivity growth, frictions in financial markets, and 【Research Methods】 demographic changes. The second strand of This project consists of three stages: fact finding, research emphasizes the role of self-fulfilling model validation, and counter factual simulation. deflationary expectations as a cause of the In the fact finding stage, we will compare episodes liquidity trap. In this project, we will conduct a of deflation that occurred in the past. Specifically, survey on inflation expectations among we will collect data regarding these episodes of and firms to test whether deflation deflation to conduct a comparative panel analysis. was driven by expectations. Next, in the model validation stage, we will consider the following six hypotheses for 【Publications Relevant to the Project】 persistent deflation in Japan: (1) the “bad luck” [1] “Closely Competing Firms and Price hypothesis (i.e., Japan’s economy happened to be Adjustment: Some Findings from an Online hit by multiple adverse shocks); (2) self-fulfilling Marketplace,” T. Mizuno, M. Nirei, T. Watanabe, expectations for the and/or the Scandinavian Journal of Economics, Volume 112, exchange rate; (3) ; (4) Issue 4, 673-696, December 2010. à la ; (5) the Balassa-Samuelson [2] “Monetary and in a Liquidity Trap: effect; and (6) a shortage of inside . Finally, The Japanese Experience 1999-2004,” M. Iwamura, in the counter factual simulation stage, we will use T. Kudo, T. Watanabe, in T. Ito and A. Rose (eds.) the model(s) chosen in the second stage to Monetary Policy with Very Low Inflation in the quantitatively compare various policy options, Pacific Rim, NBER-EASE Volume 15, 233-273, including ones which have not actually been 2006. adopted by central banks, in terms of their costs 【Term of Project】FY2012-2016 and benefits. 【Budget Allocation】152,000 Thousand Yen 【Homepage Address and Other Contact 【Expected Research Achievements and Information】 Scientific Significance】 [email protected]