IMES DISCUSSION PAPER SERIES Discussion Paper No. 2000-J-10 INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN 103-8630 30

IMES Discussion Paper Series 2000-J-10 2000 4 * ** *** 99 2 * E-Mail: kunio.okina@boj.or.jp ** 1 E-Mail: shigenori.shiratsuka@boj.or.jp *** 1 E-Mail: hiroshi.fujiki@boj.or.jp

...1...2...3...6...8... 10... 10... 11... 14... 14... 17... 18... 20... 20... 21... 23 2... 24... 26...26...27... 28...28...29... 31... 35 2... 35...35...36... 37... 39... 39... 40... 42... 43... 45

1 2 2 2000 2 1 1 2 2 1999 12 17 2000 (1) (2) 1

1 2 3 4 5 7 8 1999 2 2

1999 2 3 4 4 5 1999 4 1 2 2 1999 4 1 3 1999 2 12 4 1999 9 21 1999 10 13 5 1999 4 13 % 3

1 7 2 1 1999 1999 Y2K Y2K 2 Y2K 1 3 6 1 4

1 1 1 2000 2 3 0.04% 1 0.12% 5

6 7 6 1998 CP 7 [1999, 2000] Greenspan [1997] 6

M2+CD k =M2+CD GDP 1970 1986 3 k 1992 M2+CD 1992 1996 1997 8 3 9 4 8 1986 1 1987 k 9 1999 1997 1998 1999 7

2 10 11 1 3 2000 50 10 11 [2000] 8

2 12 13 12 FB 13 Cole and Kocherlakota [1998] 2 9

1999 14 3 14 1999 12 17 (1) (2) (3) (4) (5) (6) 10

Bernanke, Laubach, Mishkin, and Posen [1999] [1999] Ito [1999] ECB 1 11

15 1 15 1980 [2000] [1997] 12

1 16 [1999] Ito [1999] 16 [1999] 13

2 1 2 5 Clarida, Gali, and Gertler [1999] 14

6 17 17 15

1 16

18 Bernanke [1999] Bernanke [1999] Bernanke [1999] 19 [1999] [1999] 20 McCallum [1999] Goodfriend [1999] Goodfriend [1999] 18 Bernanke [1995] 19 20 17

Krugman [1999a] 21 Krugman [1999a] [1999]2 3 22 [2000] [2000a, b] [2000] 23 Itoh and Shiomi [1999] 21 Krugman[1999b] 22 [2000] 23 [2000] 18

2000 2 4 2 2 2 5 1997 11 2 4 4 7 1999 3 11% 11 43.4% 1999 12 9 9 10.6% 11 608 GDP 122.5% 1999 19

[1999] 1956 98 [2000a] 24 Frenkel [1998] 1980 5 7 24 Meyer [1999] in cases of a nominal interest rate bound, fiscal policy could and should carry more of the stabilization burden, as has been the case in Japan recently. 20

Goodfriend [1999] Goodfriend [1999] 25 2 25 Goodfriend [1999] 21

Goodfriend [1999] Shiller [1990] Shiller [1990] 22

26 1 2 27 2 Goodfriend [1999] Goodfriend [1999] 26 Eijffinger [1998] 27 23

Goodfriend [1999] Bryant [1999] Woodford [1999] 2 24

2 1 28 2 2 29 28 1997 11 29 [1999] [1999] 25

30 Bernanke [1999] 10 0.07% 0.03% 0.04% 0.05% 0.06%10 7 10 30 2000 1 30 26

[2000a] 8 31 4 31 27

1 Goodfriend [1999] 28

1 [2000a] 1 2% 2 Asher [1999] 2 29

32 33 32 33 [2000a] Bernanke [1999] 30

1 2 1 2 Goodfriend [1999] 1 M2+CD k 3 3 k k f M2+CD = k GDP M2+CD = f 2 31

GDP = (f/k) k f k f k f GDP 1999 1999 GDP = (f/k) 1999 k f 9 k f k 1970 86 GDP 1999 18% 34 GDP 18% k f 2 3% 6% 34 1986 1 8 32

11 2.4 35 M2+CD 1 2 60 2% 2% 10 100 10 35 33

10 2.5% 1 2 2.4 60 70 5% 3 4% 2 1% 12 2000 2 4 4.8 1 2.5 2 1.25 60 2.4 2.5% 5%1 2 12 5 8 34

2 2 1998 CP CP 35

10 1999 293 3% 300 10 36

37

36 [2000a] 36 38

Sargent and Wallace [1981] 2 [1999] FRB ECB 39

ECB 37 FRB FOMC Federal Open Market Committee central tendency Padoa-Schioppa [1996] 1970 [2000] 37 ECB HICI 2% 40

38 FRB 1997 9 Greenspan 1997 38 ECB ECB Noyer [2000] 41

1 Bernanke and Mishkin [1997] constrained discretion Kuttner and Posen [1999] 42

39 Woodford [1999] 39 2000 3 10 3 8 4 43

McCallum [1995] 1 44

[1999] [2000] ECB Issing [1999] 1 Goodfriend [1999] Goodfriend [1999] 40 40 McCallum and Goodfriend[1988] 1 45

Bernanke and Gertler [1995] External Finance Premium Goodfriend [1999] Goodfriend [1999] 2 2 [1999] 41 41 46

Q Bernanke and Gertler [1995] [2000a] 2000 1 [2000b] 2000 3 9 16 [1999] 1999 11 13 [1999] forward looking 1999 7 47

[2000] [1999a] 18 3 [1999b] 18 5 [2000] [1999] 99-J-3 [2000] 1 29 [1997] 16 3 33-59 [1999] [1999] [1999] 11 13 [2000] 3 11 [2000] 2000 3 21 [2000] 3 3 [2000] IMES Discussion Paper Series 2000-J-6 I [1999] 18 5 48

[2000] Diamond Harvard Business December-January 2000. [1999] 180 6 H [1999] 18 5 [1999] 1999 11 [2000] Asher, David, [1999] Japan s Debt Trap, Asian Wall Street Journal, September 7, 1999. Bernanke, Ben S. [1995] The Macroeconomics of Great Depression: A Comparative Approach, Journal of Money, Credit and Banking 27(1), 1-28. [1999] Japanese Monetary Policy: A Case of Self Induced Paralysis? mimeo, and Frederic. S. Mishkin [1997] Inflation Targeting: A New Framework for Monetary Policy? Journal of Economic Perspectives 11, 97-116., and Mark Gertler [1989] Agency Costs, Net Worth and Business Fluctuations, American Economic Review 79, 14-31., and [1995] Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Journal of Economic Perspectives, 9 (4), pp. 27-48., and [1999] Monetary Policy and Asset Price Volatility, Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter, 1999, pp. 17-51., Ben S., Thomas Laubach, Frederic S. Mishkin, Adam S. Posen [1999] Inflation Targeting, Princeton University Press. Clarida, Richard, Jordi Gali, and Mark Gertler [1999] The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature 37, 1999, pp. 1661-1707. 49

Cole, Harold L., and Narayana Kocherlakota [1998] Zero Nominal Interest Rates: Why They re Good and How to Get Them, Federal Reserve Bank of Minneapolis Quarterly Review 22 (2), pp. 2-10. Eijffinger, Sylvester [1998] Foreign Exchange Intervention: Objectives and Effectiveness, Elgar Reference Collection. Fisher, Irving, [1933] The Debt Deflation Theory of Great Depressions, Econometrica 1, 337-357. Frenkel, Jacob A. [1998] Central Bank Independence and Monetary Policy, 15 Goodfriend, Marvin [1999] Overcoming the Zero Bound on Interest Rate Policy, 1999, mimeo. Greenspan, Alan [1997] Remarks, at the 15th Anniversary Conference of the Center for Economic Policy Research at Stanford University, Stanford, California, September 5, 1997. Ito, Takatoshi [1999] A Target for the Bank of Japan, Financial Times, October 19, 1999. Itoh, Motoshige, and Naoki Shimoi [1999] On the Role of Monetary Policy in a Deflationary Economy: The Case for Japan, mimeo. Issing, Otmar [1999] The ECB s monetary policy in the context of globalization Speech at the European Central Bank at the conference Weltachsen, organized by the Center for European Integration Studies, the Center for Development Research and federal city of Bonn, Bonn, 11 November 1999. Krugman, Paul, R. [1999a] Three Views on Liquidity Trap and Policy Implication. mimeo. [1999b] Time on the Cross: Can Fiscal Stimulus Save Japan?, September 21, 1999. [1998] It s Baaack: Japan s Slump and the Return of the Liquidity Trap, Brookings Papers on Economic Activity, 137-187. Kuttner, Kenneth N., and Adam S. Posen [1999] Does Talk Matter After All? Inflation Targeting and Central Bank Behavior, mimeo. 50

McCallum, Bennett T., [1995] Two Fallacies Concerning Central Bank Independence, American Economic Review 85, Papers and Proceedings, 207-211., and Marvin Goodfriend [1988] Theoretical Analysis of the Demand for Money, Economic Review, Federal Reserve Bank of Richmond, January/February. Noyer, Christian, [2000] The Short Past and the Long Future of the Euro, speech delivered at the conference organized by le Club des Affaires de Berline e. V. Okina, Kunio, [1999] The risks of single-minded targeting, Financial Times, November 10, 1999. Padoa-Schioppa, Thomaso, [1996] Styles of Monetary Management, Monetary and Economic Studies 14 (1), 40-64. Sargent, Thomas, and Neil Wallace, [1981] Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis, Quarterly Review 5, 1-17. Shiller, Robert [1990] The Term Structure of Interest Rates, in B. M. Friedman and F. H. Hahn Eds. Handbook of Monetary Economics Vol. 1, Elsevier Science Publishers, 1990. Woodford, Michael, Commentary: How Should Monetary Policy Be Conducted in a Era of Price Stability?, mimeo, 1999. 51

1 2.5 2.0 O/N JGB(1 ) JGB(5 ) TB 3 ) JGB(2 ) JGB(10 ) 1.5 1.0 0.5 0.0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 1998 1999 Bloomberg 2 140 120 100 80 60 40 20 0 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 1997 1998 1999 52

3 k M2+CD k k k 1970 1986 53

4 M2+CD 6 5 4 3 2 1 0-1 -2-3 -4 M2+CD 9 4 9 5 9 6 9 7 9 8 9 9 5 ( % ) 20 18 16 14 12 10 8 6 4 2 0 1995 1996 1997 1998 1999 5 54

6 ( % ) 5.0 16 4.0 3.0 10 O/N 14 12 2.0 10 1.0 8 0.0 6-1.0 4-2.0 2-3.0 1995 1996 1997 1998 1999 0 7 10 Federal Reserve Board 85th Annual Report, 1998 European Central Bank Consolidated Opening Financial Statement of the Eurosystem as at 1 January 1999 FRB 1 55

8 ( % ) 9 8 7 6 5 O/N CD3 10 4 3 2 1 0 91 92 93 94 95 96 97 98 99 9 1999 GDP k k 1970 1986 1970 1986 GDP 1999 56

10 0 1 2 3 4 5 2.5 54.8 60.2 66.9 75.6 87.1 103.3 3.0 28.1 30.8 34.2 38.5 44.3 52.4 3.5 19.2 21.0 23.3 26.2 30.0 35.4 4.0 14.8 16.1 17.8 20.0 22.9 27.0 4.5 12.1 13.2 14.6 16.3 18.6 21.9 5.0 10.4 11.3 12.4 13.8 15.8 18.5 5.5 9.1 9.9 10.8 12.1 13.7 16.1 6.0 8.2 8.8 9.7 10.7 12.2 14.2 0 1 2 3 4 5 2.5 2.6 2.4 2.2 1.9 1.7 1.4 3.0 5.1 4.7 4.2 3.7 3.3 2.7 3.5 7.5 6.8 6.2 5.5 4.8 4.1 4.0 9.7 8.9 8.1 7.2 6.3 5.3 4.5 11.9 10.9 9.9 8.8 7.7 6.6 5.0 13.9 12.8 11.6 10.4 9.1 7.8 5.5 15.8 14.6 13.3 11.9 10.5 9.0 6.0 17.7 16.3 14.9 13.4 11.8 10.1 2% 10 9 8 7 6 5 2.5 95.6 96.0 96.4 96.8 97.2 97.7 3.0 91.5 92.2 93.0 93.8 94.6 95.4 3.5 87.5 88.6 89.7 90.8 92.0 93.2 4.0 83.8 85.1 86.5 88.0 89.5 91.1 4.5 80.2 81.8 83.5 85.3 87.1 89.0 5.0 76.8 78.7 80.6 82.6 84.8 87.0 5.5 73.6 75.7 77.8 80.1 82.5 85.1 6.0 70.6 72.8 75.2 77.7 80.3 83.2 57