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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Policy regime change against chronic deflation? Policy option under a long-term liquidity trap
Ippei Fujiwara
Yoshiyuki Nakazono
Kozo Ueda

This paper evaluates the role of the first arrow of Abenomics in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, a policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that the reaction of monetary policy to inflation has been declining since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Estimated changes in perceptions are not abrupt enough to satisfy Sargent's (1982) criteria for a regime change. This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?

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Ippei Fujiwara & Yoshiyuki Nakazono & Kozo Ueda, Policy regime change against chronic deflation? Policy option under a long-term liquidity trap, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 233, 01 Mar 2015.
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Note: Published as: Fujiwara, Ippei, Yoshiyuki Nakazono and Kozo Ueda (2015), "Policy Regime Change Against Chronic Deflation? Policy Option Under a Long-term Liquidity Trap," Journal of Japanese and International Economies 37: 59-81.
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DOI: 10.24149/gwp233
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