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Monetary Policy During Japan'S Lost Decade

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  • R. ANTON BRAUN
  • YUICHIRO WAKI

Abstract

We develop a quantitative costly price adjustment model with capital formation for the Japanese economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long‐run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long‐run interest rate target of 2.3% during the 1990s avoids the zero bound and enhances welfare.

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  • R. Anton Braun & Yuichiro Waki, 2006. "Monetary Policy During Japan'S Lost Decade," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 324-344, June.
    • Handle: RePEc:bla:jecrev:v:57:y:2006:i:2:p:324-344
    DOI: 10.1111/j.1468-5876.2006.00371.x
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