Understanding the Costs of Deflation in the Japanese Context

November 1, 2003

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the cost of deflation in the context of Japan's ongoing deflationary episode. The impact of deflation owing to the zero interest rate bound on monetary policy, wage rigidity, redistribution of wealth from debtor to creditor, and inflexibilities in the financial sector are examined. It is seen that the generalized decline in the Japanese price level, however gradual or mild, has substantially exacerbated the economy's adjustment process under already difficult economic conditions.

Subject: Asset prices, Consumer price indexes, Deflation, Financial services, Inflation, Prices, Real interest rates

Keywords: aggregate demand, Asset prices, Consumer price indexes, Core CPI deflation, debt-deflation theory, Deflation, deflation pressure, Financial Sector, GDP deflator, Inflation, inflation expectation, monetary policy, monetary policy efficacy, price, Real interest rates, rising prices, unanticipated deflation, Wage Rigidity, WP

Pages:
27
Volume:
2003
DOI:
https://doi.org/10.5089/9781451875065.001
Issue:
215
Series:
Working Paper No. 2003/215
Stock No:
WPIEA2152003
ISBN:
9781451875065
ISSN:
1018-5941

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