Achieving the Bank of Japan's Inflation Target
38 Pages Posted: 3 Dec 2019
Date Written: November 2019
The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model's baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.
Keywords: Purchasing power parity, Fiscal sector, Economic theory, Monetary policy, Central bank policy, Inflation targeting, forecasting, fan charts, zero lower bound, FPAS, WP, inflation expectation, output gap, core inflation, ELB, inflation target
JEL Classification: E52, E58, F47, O23, E01, G21, O24, E62
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