Comments on "Price Stability and Japanese Monetary Policy."

Invoking the venerable quantity theory of money, Hetzel (2004) argues that central banks are not powerless to end deflation, even when short-term interest rates are zero. While agreeing with his overall conclusion that central banks do possess tools to fight deflation, this commentary points out that the six-fold expansion in current account balances over the past three years has thus far failed to have any discernable impact on the volume of M2 + CDs in Japan. This observation highlights an important obstacle to the direct implementation of the quantity theory's policy prescription when the zero lower bound on the short-term nominal interest rate is binding. Hetzel's proposal to link Japan's current account balance target is nonetheless a useful one, however, as it would represent a step toward a price level target.