NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Takeshi Kudo

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Working Papers

February 2005Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004
with Mitsuru Iwamara, Tsutomu Watanabe: w11151
We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999-2004. First, we find that the Bank of Japan's policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan's commitment failed to have su.cient influence on the market's expectations about the future course of monetary policy. Third, we find that the primar...

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