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Monetary and fiscal policy in a liquidity trap: the Japanese experience 1999-2004
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 ...