The Great Recession: Lessons for Macroeconomic Policy from Japan
Author(s)
Kuttner, Kenneth N.; Posen, Adam S.
Abstract
The purpose of this paper is to establish the record and assess empirically the effects of macroeconomic policies undertaken in Japan in response to the Great Recession. The paper begins by characterizing the depth and breadth of the Japanese Great Recession, in terms of the basic measures of output, potential output, and inflation; the resulting picture confirms its demand-side origin. The paper then looks at the record of monetary policy and its impact on prices and exchange rates over the period, and from this experience is gleaned some lessons as to the efficacy of various channels of monetary transmission in extremis. It goes on to examine the role of fiscal policy, both by estimating the direct impact of spending and taxes on data generating process (DGP), and by assessing the degree of Ricardian offset in the response of saving. Next it describes the breakdown of the Japanese financial system after the partial deregulation of the mid-1980s, and examines the nonmonetary impact of financial distress. It concludes by summarizing the lessons for macroeconomic policy that are drawn from the Japanese experience.
