Monetary Policies in the US and Japan

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This paper presents comparative analysis of Japanese and the US monetary policies during the recession in 1990s and focuses on transmission mechanisms used by central banks in conducting policy. In spite of some differences, two central banks employed the same instruments and were similar in their operating procedures. The implementation of monetary policy in the U.S was successful which led to increase in real GDP growth, decrease in unemployment, and low and stable inflation. However, monetary policy in Japan did not follow the same path. In our paper we endeavored to provide a response to the following question: “What does account for the successful implementation of the monetary policy in the US and failure in Japan in 1990?” The first…show more content…
As for supply shocks, they prevent policymakers from stabilizing the real economy and inflation at the same time, therefore, can cause considerable challenges. According to Mankiw, even though the Gulf War resulted in energy supply shocks, these shocks were easy to deal with. In other words, the partial success of the monetary policy in the U.S is due to favorable circumstances.
Success of the Fed during the recession can also be explained by the fact that policymakers` were able to avoid spiraling inflation. Blanchard (1996) describes spiraling inflation as a situation when inflation becomes worse because of the interactive relationship between wages and prices. In other words, spiraling inflation occurs when increase in wages leads to increase in prices, and, increase in prices leads to even higher wages. Taking into consideration the fact that the U.S economy suffered from supply shocks, spiraling inflation was a possible outcome. To prevent the economy from such an “illness”, the Fed opted for responding to inflation more aggressively by adjusting rate of interest. Figure 5 provides response of federal funds rate to a 1-percentage point increase in core inflation (Mankiw, 2001). What we see is that in 1960s, 1970s, 1980s federal funds rate was less responsive to increase in core inflation when compared to that of 1990s. As a result, monetary policy in 1990s
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