Saturday, December 5, 2009

Gagnon's Paper

Is here and it is getting a lot of play.

I very much agree with his sentiments, especially on Japan. He writes: "The Bank of Japan should state more clearly its intention to return inflation to at least 1 percent over the next two years, purchase an additional ¥100 trillion of longer-term debt securities with an average maturity of around 7 years, and commit to a further ¥100 trillion in such purchases in 2011 if core inflation over the next 12 months remains negative."
That's a fistful of yen. Unfortunately, the Japanese Central Bank is far too conventional to do much more than ¥10 trillion. Sad.

The part that makes me upset is that I suspect the financial press in Japan, who sometimes look at academic research and talk to economists, are not getting the message from the economic community that, YES, It's totally obvious that Japan should be printing fistfuls of yen, and that Japanese monetary policy has been terribly misguided now for two decades.

I think a visitor to Chris Sims or Michael Woodford's homepage would be impressed by the sophistication of the models and the abundance of research, but are these monetary titans sophisticated enough to state what is completely obvious to laypeople about Fed or Nichigin monetary policy? That's not clear to me. And, as I've blogged about before, Blanchard simply gets Japan wrong in his undergraduate textbook.


  1. Japan has been trying this monetary policy for, what, 17 years. I guess they could try it again. Might work.

    Gagnon's paper is nonsense. If they knew how to create inflation, they would have done so by now. Money just doesn't work the way the Monetarist's model says it does.


  2. Dear Alan-- I posted about Japan here:

    Key is that Japan tried just $300 billion (a mere pittance) of QE for 3 years, it seemed to work, so they reversed it (foolishly), after which they promptly returned to deflation and recession.

    Basically, Japan's monetary policy for 17 years was to twiddle its thumbs. What did you think they were doing?