Are we turning Japanese: The 7 faces of The Peril

Abstract (via James Bullard @ St Louis Fed)

In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years. To frame the discussion, I rely on an analysis that emphasizes two possible long-run outcomes (steady states) for the economy, one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data I consider seem to be quite consistent with the two steady state possibilities. I describe and critique seven stories that are told in monetary policy circles re garding this analysis. I emphasize two main conclusions: (1) The FOMCs extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program o¤ers the best tool to avoid such an outcome.

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17. August 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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