Raising an Inflation Target: The Japanese Experience with Abenomics

44 Pages Posted: 7 Jun 2016

See all articles by Andrea De Michelis

Andrea De Michelis

Government of the United States of America - Division of International Finance (IFDP)

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Date Written: 2016-05

Abstract

This paper draws from Japan’s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in Japan since late 2012. Our analysis indicates that Japan has made some progress towards overcoming deflation, but further measures are needed to raise inflation to 2 percent in a stable manner.

Keywords: Abenomics, Credibility, Deflation, Inflation target, Japan, Monetary policy

JEL Classification: E31, E32, E47, E52, E58, F31, F41

Suggested Citation

De Michelis, Andrea and Iacoviello, Matteo M., Raising an Inflation Target: The Japanese Experience with Abenomics (2016-05). FRB International Finance Discussion Paper No. 1168. Available at SSRN: https://ssrn.com/abstract=2789367 or http://dx.doi.org/10.17016/IFDP.2016.1168

Andrea De Michelis (Contact Author)

Government of the United States of America - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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