Home > Japan, Monetary Policy > Roles Reversed: Bank of Japan Lectures Bernanke

Roles Reversed: Bank of Japan Lectures Bernanke

A speech from BOJ Deputy Governor Kikuo Iwata last night:

More recently in the United States, nominal rates went up, inflation expectations came down, and the expected real rates picked up after market participants started forming a view that the Fed would start tapering the pace of its asset purchases in light of Chairman Bernanke’s testimony on May 22, while in reality this was meant to slow the pace of increase in excess reserves. By contrast, the FOMC’s decision to continue with its quantitative easing on September 18 led to a decline in nominal rates, a rise in inflation expectations, and a decline in the expected real rates (Chart 23).

How beautifully ironic that the BOJ board is able to produce a critique of Bernanke’s tight money.  Iwata continues:

What should we make of these episodes? In my view, they owe much to the fact that market participants make judgments on the monetary policy regime after they see changes in the monetary base and the excess reserves, and then form projections for the money stock, the future course of interest rates, and projections for prices.

What matters to interest rates and inflation expectations is the monetary policy regime of a central bank and market participants’ views on the prospects for the money stock based on such a regime. The current level of money stock is irrelevant. It is in this sense that the simple “quantity theory of money,” in which there is a one-to-one relationship between the current money stock and prices, does not hold in practice. Nonetheless, there is a close relationship between the projected future course of the money stock and inflation expectations, and the present rate of inflation is determined based on inflation expectations formed in that way.

Excellent stuff.

Categories: Japan, Monetary Policy
  1. W. Peden
    October 18, 2013 at 21:21

    Hilarious reversal!

    The BoJ (or rather the Japanese government instructing them) has certainly done a lot to disconfirm the liquidity trap claptrap over the past year. For the first time since the mid-80s, Japan can be held up as an example of how to do good monetary policy.

  2. James in London
    October 19, 2013 at 07:55

    Brutally frank. By George! I think they’ve got it.

  3. james in london
    October 30, 2013 at 08:27

    Off topic, but Spanish (first release) 3Q RGDP growth of 0.1% (hurray) could be a disappointment as NGDP could have fallen judging by the CPI numbers. I can’t find any NGDP figure, or GDP deflator. We have to wait a few months for the real data.
    Or maybe 3Q is OK and 4Q will have the negative deflator, as October CPI goes negative.

    • October 30, 2013 at 09:07

      Looking at the Spanish GDP figures in Eurostat, the GDP deflator has been very flat until recently, much lower than the HICP. Divergence of the CPI and GDP deflator seems to be a common issue for modern depressions; Lars has done posts on this for Japan and the Eurozone.

      I wonder why this is – it shows up in the ex indirect tax variants so it’s not just a VAT thing.

  4. james in london
    October 30, 2013 at 14:18

    I struggle with understanding CPI when it is so dominated by housing costs, usually imputed rents or actual rents that move only very slowly, so the index only moves very slowly, by creation. And those taxes, of course, not VAT but those masquerading as utility “bills”. those “administered” prices. Are they inflationary? I don’t know.

    Is the GDP deflator just as mysterious? Probably. Like trying to compare the biology of one spectre vs another. A version of counting angels on pinheads. Who’d be a national accounts statistician these days?

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