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Optimal Monetary Policy in a Liquidity Trap: Evaluations for Japan’s Monetary Policy

Author

Listed:
  • Kohei Hasui

    (Aichi University)

  • Yuki Teranishi

    (Keio University)

Abstract

This paper shows that the Bank of Japan’s monetary policy shares several common points with optimal monetary policy in a liquidity trap to large negative shocks by the recent pandemic. The zero interest rate policy continues even after inflation rates sufficiently exceed the 2 percent and hit the peak. Optimal monetary policy keeps the zero interest rate policy until the second quarter of 2024 and the Bank of Japan continues the zero interest rate at least until the second quarter of 2024. Recent high inflation rates can be explained by a prolonged zero interest rate policy. Average inflation rates from 2021 to 2023 years are 2.2 percent and 2.1 percent in the data and the simulation, respectively. According to scenarios for anchored inflation expectations and long-run natural interest rates, the optimal timing to terminate the zero interest rate policy and a speed of the monetary tightening after the zero interest rate policy change. As anchored inflation expectations and natural interest rates decline, the zero interest rate policy continues longer.

Suggested Citation

  • Kohei Hasui & Yuki Teranishi, 2024. "Optimal Monetary Policy in a Liquidity Trap: Evaluations for Japan’s Monetary Policy," Working Papers on Central Bank Communication 050, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utmpwp:050
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    More about this item

    Keywords

    liquidity trap; optimal monetary policy; inflation persistence; forward guidance;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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