A Theory of Quantitative Easing Policy and Negative Interest Policy Based on the Japanese Experience

Authors

  • Masayuki Otaki Institute of Social Sciences, The University of Tokyo

DOI:

https://doi.org/10.6000/1929-7092.2016.05.20

Keywords:

Quantitative easing monetary policy, negative interest policy, Abenomics

Abstract

Using a two-period overlapping-generations model, I elucidate how quantitative easing policy and negative interest policy affect an economy based on the Japanese experience under the Abe cabinet. Quantitative easing policy forces a huge amount of money hoarding. Accordingly, the rate of return for money is required to rise. This implies that disinflation and/or deflation are accelerated in Japan, which is in line with reality. On the other hand, quantitative easing policy stimulates the aggregate demand, which brings about a mild recovery in business. The business upturn tightens the foreign market because of an increase in imports and causes the home currency to depreciate.

Negative interest policy implies there is a tax levied on money hoarding. Hence, as longas the government expenditure is kept constant, money circulating in an economy decreases, thereby discouraging business. Such a downturn reduces aggregate income and imports. This induces excess supply of foreign exchange. Consequently, the exchange rate appreciates to equilibrate the market.

These characteristics of the business cycle in conjunction with changes in the attitude of the monetary authority are entirely consistent with the current Japanese experience under Abenomics.

References

Laursen, Svend and Metzler, Lloyd, A.1950. “Flexible Exchange Rates and the Theory of Employment.’’ Review of Economic Statistics 32:281-99.
http://dx.doi.org/10.2307/1925577
Otaki, Masayuki. 2012. “A Keynesian Model of a Small Open Economy under a Flexible Exchange Rate.” Theoretical Economics Letters 2:278-82.
http://dx.doi.org/10.4236/tel.2012.23051
Otaki, Masayuki. 2015. Keynesian Economics and Price Theory: Re-orientation of a Theory of Monetary Economy. Springer, Tokyo.
http://dx.doi.org/10.1007/978-4-431-55345-8
Otaki, Masayuki. 2016. Keynes’s General Theory Reconsidered in the Context of the Japanese Economy. Springer-Briefs in Economics, Development Bank of Japan Research Series, Springer, Tokyo.
http://dx.doi.org/10.1007/978-4-431-55915-3

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Published

2016-08-17

How to Cite

Otaki, M. (2016). A Theory of Quantitative Easing Policy and Negative Interest Policy Based on the Japanese Experience. Journal of Reviews on Global Economics, 5, 243–247. https://doi.org/10.6000/1929-7092.2016.05.20

Issue

Section

Special Issue: Trends in Monetary Policy and Future Directions