Reflecting recent economic developments in Japan, there is a growing interest in how monetary policy should be conducted under low inflation and nominal interest rates. Among several proposed solutions, the conventional wisdom seems to be to commit to lower future short-term nominal interest...

Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents' excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pecuniary externality affects a bank's leverage....

In Japan, the inflation rate declined to near-zero, whereas the monetary policy faced a zero lower bound (ZLB) in the 1990s. We examine whether trend inflation had fallen to near-zero prior to the ZLB. To achieve this, we estimate Japanese pre-2000 trend inflation developing a Markov-switching...