Monetary Policy and the Liquidity Trap(in Japanese)

In this paper, we tried to examine empirically the constraints to monetary policy posed by the zero-lower bound on nominal interest rates. To evaluate numerically the views expressed on policy effectiveness, we run several policy simulations, making full use of the two different versions of the ESRI Short-Run Macroeconometric Model, i.e. the backward-looking version and the forward-looking version. Though the monetary transmission mechanisms in the real world may be far more complicated than those depicted in the compact model, the authors believe that we could learn (or obtain a new understanding of) the following lessons from our model simulations.1) The effectiveness of monetary policy in Japan seems to have declined through the 1990s in its backward-looking settings, as suggested by the theory of the liquidity trap.2) However, with forward-looking agents, monetary policy still may be effective in fighting deflation. There are (at least) two distinct possible forward-looking responses to the permanent monetary expansions under zero interest rates, i.e. bull and bear equilibrium, depending on the people's knowledge or their belief in long-run monetary neutrality.