Stimulus 2: Double Counterfactual


It’s getting kind of hard thinking up interesting titles for the same subjects, but I promise you, readers, that I will spend 99.9% of my time doing so!

Anyway, I have a previous post on what I regard as a very strong fiscal stimulus counterfactual from the EU. What luck, then, I find another from Japan:

Perhaps Japan will take a note out of Israel’s book. There is an ongoing war of words between Japan’s finance ministry and its central bank, in which the government asks the bank to tackle deflation, and the bank asks the government to fix the fiscal deficit.

Now this is exciting on two levels. The first is that it pretty clearly dispels the myth that Japan has ever been practicing witchcraft, err, in a “liquidity trap”. The second is that the Bank of Japan is determined to hit its (very explicit) 1% deflation target regardless of fiscal policy. And, of course, the BoJ would offset any aggregate effects of fiscal tightening to hit it’s target, as well…ostensibly raising the price level. It seems that the BoJ is very committed to its price level target. Of course, threatened with the widespread outbreak of inflation (sarcasm) the bank would have none of it.

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