Wednesday, June 4, 2008

Lecture 10 - Learning from Japan

See packet page 8

Key Questions
1. Is it possible to recognize when an economy is moving to a phase of sustained deflation?

Japan had bad forecasting. (See graph on packet page 7) Monetary policy is usually based on forecasts. Therefore, their monetary policy was too tight.

Use the Taylor Rule, developed by John B Taylor, (see page 16 and graph on pg 17). Greenspan is criticized for keeping the interest rates below the taylor rule during 2004-6.

More factors depressing AD further (need this slide)

Bursting of the asset price bubble
Weakened banking system
Deflationary expectation: as people anticipate the deflation to continue, tehy postpone their...

Was the Fiscal Policy Stance Appropriate?
See packet page 10
Tax cuts vs. spending increase
Temporary vs permanent

Fiscal packages depend heavily on public works programs (G up) (such as Kansai airport) and temporary income tax cuts (such as 5.9 trillion yen income tax rebate in FY 1994)

It seems that this heavy reliance on public works programs is politically driven (political connection of construction companies). See "bridge to nowhere". Many projects such as bridges and roads in remote areas failed to lead to second-, third-round private spending increase.

Temporary income tax... (see rest of slide in packet)

Fiscal packages depend heavily

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