Bernanke & Japanese Monetary Policy

Clark Benton

Overview:

In his paper entitled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Federal Reserve Chairman Ben Bernanke severely accosts the Bank of Japan and its use of monetary policy during the 1990’s. He asserts that the Bank of Japan failed to take aggressive action to reverse the economic stagnation that has plagued the country for over a decade. According to Bernanke, non-traditional monetary policy options could circumvent the problem of the zero lower bound on interest rates that the Bank of Japan faced in the 1990’s. Using empirical evidence, Bernanke lays out a number of non-traditional monetary policies that can be used to boost aggregate demand when traditional monetary policy is limited, although he is uncertain about the scale to which these operations must be carried out as well as their effectiveness. In response to the Great Recession in the U.S., the Federal Open Market Committee brought interest rates to all time lows, presenting the Fed with the same problem of the zero lower bound on interest rates that the Bank of Japan has dealt with in recent decades. This has provided Bernanke with a unique opportunity to test his non-traditional monetary policy measures. The question that remains is have these policies been successful in revamping the U.S. economy? This paper will examine Japan’s use of monetary policy in the 1990s and 2000s, discuss Bernanke’s non-traditional monetary policy measures and propose methods for carrying out an empirical analysis of the effectiveness of said policy in relation to the Great Recession.

Plan going forward:

Piggyback off Bernanke’s analysis of the effectiveness of non-traditional monetary policy in Japan, applying his “no-arbitrage” model to determine the effectiveness of non-traditional monetary policy in the U.S. since 2008.

Preliminary conclusions:

Non-traditional monetary policy in the U.S. has been effective (so far) in preventing deflation. The Fed’s establishment of a clear inflation target has also been effective in eliminating inflationary concerns among investors. However, non-traditional monetary policy has not been very affective in boosting aggregate demand in the U.S. economy.