Skip to main content

Monetary Policy and the Lost Decade: Lessons from Japan

Buy Article:

$51.00 plus tax (Refund Policy)


I investigate how monetary policy can avoid a deflationary slump when policy rates are near zero by studying interest rate policy during Japan's “Lost Decade.” Estimation results suggest that the Bank of Japan's interest rate policy fits a conventional reaction function with an inflation target near 1%. The disapointing economic performance thus seems primarily due to adverse economic shocks rather than extraordinary policy errors. Also, counterfactual policy simulations suggest that simply raising the inflation target would not have substantially improved performance. However, price-level targeting or combining a higher inflation target with an aggressive output response would have achieved superior stabilization results.

Keywords: Bayesian econometrics; C22; E31; E52; deflation; liquidity trap; monetary policy

Document Type: Research Article


Affiliations: Daniel Leigh is an Economist in the Research Department of the International Monetary Fund (  )., Email:

Publication date: 2010-08-01

  • Access Key
  • Free ContentFree content
  • Partial Free ContentPartial Free content
  • New ContentNew content
  • Open Access ContentOpen access content
  • Partial Open Access ContentPartial Open access content
  • Subscribed ContentSubscribed content
  • Partial Subscribed ContentPartial Subscribed content
  • Free Trial ContentFree trial content
Cookie Policy
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more