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Fight Deflation with Deflation, Not with Monetary Policy

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  • JONATHAN E. LEIGHTNER

Abstract

The Japanese government has pinned its hopes of defeating deflation on monetary policy. This article applies a new analytical technique, reiterative truncated projected least squares, (RTPLS) to monthly Japanese data from January 1970 to January 2003. In this application, RTPLS produces a separate estimate of dCPI/d(M2 + CD) and of dCPI/d(M2 + CD) for each observation, which makes it possible to see how they change over time due to the influence of omitted variables. I find that dCPI/d(M2 + CD) falls by 55 percent between October 1997 and January 2003, hampering the Bank of Japan's efforts to fight deflation. I recommend that Japan change its strategy. I recommend that Japan fight deflation with deflation just as firefighters often use smaller fires to burn a fire break in the path of out-of-control forest fires.

Suggested Citation

  • Jonathan E. Leightner, 2005. "Fight Deflation with Deflation, Not with Monetary Policy," Japanese Economy, Taylor & Francis Journals, vol. 33(2), pages 67-93.
    • Handle: RePEc:mes:jpneco:v:33:y:2005:i:2:p:67-93
    DOI: 10.1080/2329194X.2005.11045216
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    Cited by:

    1. Leightner, Jonathan E. & Inoue, Tomoo, 2008. "Capturing climate's effect on pollution abatement with an improved solution to the omitted variables problem," European Journal of Operational Research, Elsevier, vol. 191(2), pages 540-557, December.
    2. Jonathan E. Leightner, 2013. "The Changing Effectiveness of Monetary Policy," Economies, MDPI, vol. 1(3), pages 1-16, November.
    3. Leightner, Jonathan E. & Inoue, Tomoo, 2007. "Tackling the omitted variables problem without the strong assumptions of proxies," European Journal of Operational Research, Elsevier, vol. 178(3), pages 819-840, May.

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