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Recent unorthodox monetary policies vs. orthodox theory of monetary policy: comments and views on Jordan

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  • Naotsugu Hayashi

    (Hosei University)

Abstract

This article investigates and examines theoretically and empirically the mechanisms and effects of so-called non-traditional or unorthodox monetary policies, such as quantitative monetary easing, zero interest rate policy (ZIR), and negative interest rate policy (NIR), implemented in response to the recent deflationary recession, and especially after the global financial crisis (GFC) in Japan and the United States, in discussing Jordan (Issues and challenges of monetary and fiscal policies caused by quantity easing by Central Banks, 2018), (Int J Econ Policy Stud 13, 2019). According to Friedman and Schwartz’s (Monetary history of the United States, 1867–1960, 1963) original definition, high-powered money (HPM), or monetary base (MB), comprises cash currency (CC) plus required reserves (RR) that can have the power of credit creation. However, the current Federal Reserve System (Fed) and the Bank of Japan (BOJ) have added interest-paid excess reserves (ER), which have no power of credit creation, to MB. Therefore, since ER which paid interest from October 2008 sharply increased, and as a result, MB (which includes ER) increased sharply, the Fed and the BOJ mistook this as bold quantitative monetary easing, and were overconfident of being able to easily achieve the 2% inflation target, although CC and RR increased only slightly. However, in fact, neither the 2% inflation target nor an increase in the real economic growth rate were achieved. This paper examines theoretically and empirically why they failed to achieve the 2% inflation target, and why they failed to raise the real growth rate, in spite of bold monetary easing, flexible fiscal policy, and growth strategies. We conclude that, to achieve stable growth, an appropriate, rule-based, stable monetary policy is necessary.

Suggested Citation

  • Naotsugu Hayashi, 2019. "Recent unorthodox monetary policies vs. orthodox theory of monetary policy: comments and views on Jordan," International Journal of Economic Policy Studies, Springer, vol. 13(2), pages 285-317, August.
    • Handle: RePEc:spr:ijoeps:v:13:y:2019:i:2:d:10.1007_s42495-019-00016-y
    DOI: 10.1007/s42495-019-00016-y
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    References listed on IDEAS

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    1. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    2. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    3. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
    4. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    5. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    6. Jerry L. Jordan, 2019. "New challenges for monetary and fiscal policies," International Journal of Economic Policy Studies, Springer, vol. 13(2), pages 275-284, August.
    7. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
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    Cited by:

    1. Naotsugu Hayashi, 2021. "Preface to the special feature on recent monetary policy 2," International Journal of Economic Policy Studies, Springer, vol. 15(1), pages 1-3, February.
    2. Naotsugu Hayashi, 2021. "BOJ's non-traditional monetary policies and their effects on the Japanese economy: comments and views on Harada," International Journal of Economic Policy Studies, Springer, vol. 15(1), pages 41-53, February.

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    More about this item

    Keywords

    Quantitative monetary easing policy; Zero interest rate policy; Negative interest rate policy; Interest payment on excess reserves; Definition of monetary base;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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