The Elusive Costs of Deflation and Zero Lower Bound: Reassessment of the Japanese Economy

32 Pages Posted: 3 Nov 2023

See all articles by Yuta Takahashi

Yuta Takahashi

Hitotsubashi University - Institute of Economic Research

Naoki Takayama

Hitotsubashi University - Institute of Economic Research

Date Written: October 8, 2023

Abstract

Since the 1990s, Japan's economy has faced stagnation. A prevalent perception is that this prolonged stagnation is heavily tied to Japan's struggle with deflation and the zero lower bound (ZLB) of nominal interest rates. However, upon closer examination of various measures, we find little evidence supporting this perception and conclude that the costs of deflation and ZLB are elusive. Moreover, we show that a slight extension of the three-equation New Keynesian model can account for Japan's near-zero inflation together with the zero nominal interest rate and low growth. Therefore, any assertion that Japan is trapped by costly deflation and ZLB must first be substantiated by empirical evidence.

JEL Classification: E31, E43, E52, E58

Suggested Citation

Takahashi, Yuta and Takayama, Naoki, The Elusive Costs of Deflation and Zero Lower Bound: Reassessment of the Japanese Economy (October 8, 2023). Available at SSRN: https://ssrn.com/abstract=4595741 or http://dx.doi.org/10.2139/ssrn.4595741

Yuta Takahashi (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

Naoki Takayama

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka
Kunitachi, Tokyo 186-8603
Japan

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