Japanese Monetary Policy, 1991-2001

Abstract

Analysis suggests that Bank of Japan (BOJ) policy has been insufficiently expansionary for over a decade; that the BOJ has faced special problems because of the zero lower bound on interest rates; and that the most promising approach would entail rapid base money growth effected primarily by purchases of foreign exchange. Simulation analysis with a calibrated optimizing model indicates that such a policy would probably increase Japan's net imports. The BOJ Law presents some difficulties, but these should be surmountable.