Timely Views on Deflation from Governor Shirakawa

For years economists and policymakers in the United State have been expressing fears that America would enter a Japanese-style deflation and thereby experience a lost decade like Japan in the 1990s. One of the earliest examples was the October 1999 Woodstock Vermont conference (later published in the Journal of Money Credit and Banking) on how to avoid deflation, which may have been an impetus to the Fed’s decision to hold interest rates so low in the period from 2003-2005. In his recently published history of the Federal Reserve Volume 2, Allan Meltzer reports, based on conversations at the time, that “Chairman Alan Greenspan believed and said that the country faced risk of deflation” during this period. Concerns about deflation are clearly on the minds of members of the FOMC as they meet next week.

It was therefore very helpful and quite refreshing that Bank of Japan Governor Masaaki Shirakawa’s chose to address this issue in a speech this week at the Bank of Japan, Uniqueness or Similarity? Japan’s Post-Bubble experience in Monetary Policy Studies. Hearing from a person in a top leadership position who can reflect on the experience of dealing with deflation is very useful right now. I heard the speech in person and can report that many in the audience (including me) were very positive about the interesting ideas, the clarity of the exposition, and the many helpful charts. The most discussed chart, reproduced here, suggested an eerie similarity between the United States and Japan.

Other interesting points in the speech were that the recent Japanese-style deflation has been remarkably mild compared to the Great Depression and that “Empirical studies on Japan mostly show that quantitative easing produced significant effects on stabilizing the financial system, while it had limited effects on stimulating economic activity and prices.”

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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