Abstract
In this study, we will focus on three problems related to the recent economic policy of Japan and present their answers. We will describe and analyze (i) what mechanism exists for fiscal and monetary policy and the price level, (ii) whether the modern monetary theory (MMT)proposition that public debt increases people’s wealth and savings fits into the standard macro model, and (iii) whether Blanchard’s assertion that budget deficits are net wealth in the US economy can be applied to Japan economy as well. The propositions of Sims’ the fiscal theory of the price level (FTPL), Kelton’s MMT, Japan’s Ricardian type argument the so-called Crocodile Mouth theory, and Blanchard’s non-Ricardian type of government have been understood as independent economic perceptions, but they will be shown as a theoretically coherent story.
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Notes
- 1.
In the United States in the 1980s, when P. Volcker was chairman of the Federal Reserve, countermeasures against inflation were implemented with a target value for the money supply.
- 2.
Here, the series of QQEs refers to three types: QQE introduced in 2013 and QQE with a Negative Interest Rate and QQE with Yield Curve Control introduced in 2016.
- 3.
Each Policy Board member’s CPI (less fresh food) projections are published quarterly as Price Forecasts of the Majority of the Policy Board Members in the Outlook for Economic Activity and Prices. The postponement of achievement forecasts observed during this period is synonymous with a decline in inflation expectations from the perspective of policy mechanisms.
- 4.
Payment means “to complete an economic transaction by paying some kind of consideration.“ Finality is a function to complete payment, and typical examples are the monetary base issued by the central bank and the demand deposits issued by financial institutions.
- 5.
Modern macro models such as DSGE (Dynamic Stochastic General Equilibrium) excel in economic analysis of dynamic causal relationships. MMT, on the other hand, is based on double-entry bookkeeping and the analysis is static. The lending relationship between the government and the central bank has not been analyzed in macro models. MMT's achievement is to shed light on this relationship.
- 6.
- 7.
While Blanchard (2019) conducts comparative static analysis, this paper conducts dynamic analysis by intertemporal equilibrium. Nor does Blanchard mention the mechanism of financial collapse.
References
Bank of Japan. The “Price Stability Target” under the Framework for the Conduct of Monetary Policy. January 22, 2013.
Blanchard, Olivier. 2019. Public Debt and Low Interest Rates. American Economic Review 2019, 109(4): 1197–1229.
Blanchard, Olivier. 2023. Fiscal Policy under Low Interest Rates, MIT Press.
Freeman, Scott. 1996. “The payment system, liquidity, and rediscounting, “ American Economic Review, Vol. 86, 1126–38.
Kelton, Stephanie. The Deficit Myth Modern Monetary Theory and the Birth of the People’s Economy, Public Affairs. 2020.
Sims, A. Christopher. 2013. Paper Money. American Economic Review. 103(2): 563–584.
Sims, A. Christopher. 2016. Fiscal Policy, Monetary Policy and Central Bank Independence. Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City.
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Sakai, Y. (2024). Circumstances of Questions and Theoretical Background. In: Deflation and Fiscal Deficits. SpringerBriefs in Economics. Springer, Singapore. https://doi.org/10.1007/978-981-97-0415-6_1
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DOI: https://doi.org/10.1007/978-981-97-0415-6_1
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