Why Japanese recent Monetary Policy is a regime shift…

A brilliant speech from Great Depression expert Christina Romer (HT: Mankiw’s Blog).

She says BoJ’s recent speech is a regime shift something like what US did in 1930s:


Last week, we witnessed one of the most exciting developments in monetary policymaking since the 1930s. The Japanese central bank staged an honest-to-goodness regime shift. The Bank of Japan went beyond vague promises and cheap talk. It took  dramatic actions and pledged convincingly to do whatever it takes to end deflation. 

The theoretical reasons why this regime shift may be important are well  understood by economists. Persistent deflation and anemic growth suggest that Japan continues to suffer from a shortfall of demand. But their policy interest rate is already at the zero lower bound. Furthermore, riskier, long-term rates are also very low—suggesting that unconventional policies such as large-scale asset purchases are unlikely to do much to further reduce nominal rates.


The regime shift we are seeing in Japan is just the kind of bold action that might  actually succeed in changing both inflation and growth expectations a substantial  amount. As a result, it may be an effective tool for encouraging robust recovery and an end to deflation. 

My support for that conclusion is based less on theory and more on economic  history. In the last century, there have been three times when major countries have hit  the zero lower bound on safe, short-term rates: the United States in the 1930s; Japan in  the 1990s and 2000s; and many advanced countries since 2008. The only true success  story is the United States in the 1930s. Neither Japan nor the United States and Europe  in recent years have managed to use monetary policy to jump-start a robust recovery at  the zero lower bound. But, in the mid-1930s, we did.

Prof. Crafts recently pointed UK was another such success case. 

She points how Roosevelt was a regime shift (just like it was in case of Chamberlain in UK). However Fed in 2009 is not

The fundamental feature of Roosevelt’s policy was a regime shift. This is the conclusion of an old paper by Peter Temin and Barry Wigmore, which I certainly failed  to appreciate when it was published back in 1990, but which I now think is not just right, but prescient. Roosevelt’s actions were bold enough and different enough from  what had been done before that people had no choice but to notice.

In my talk this evening, I want to discuss the evidence that economic historians and macroeconomists have accumulated that a regime shift really was important to the recovery from the Great Depression. I then want to discuss the implications of that evidence for monetary policy today. I will argue that it can help us to understand why the Fed’s actions since 2009 have done relatively little to spur recovery. Exactly what the Federal Reserve has not been willing to do is have a regime shift. I will also discuss why I think the new Japanese monetary policy really is an important break with the past, and as a result, just might work.

Nice bit. Full of graphs and data…


One Response to “Why Japanese recent Monetary Policy is a regime shift…”

  1. Tirath Says:

    Pretty cool paper – good charts indeed. It’s interesting how Druckenmiller and Bass talk about what the road ahead is going to be wrt this Japanese regime change. At least the US is going to learn what the effect of such large stimuli will be 😛

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