View source for What are some of the alternative channels that would have possibly helped boost output despite low interest rates?

'''In order to get Japan out of this Liquidity Trap they must reach a target inflation rate over the long term and stick with it no matter what the cost.'''
 
Economists, like Krugman, argue that despite a near 0 nominal interest rate, increasing the money supply can increase output.  Keynesians and those against increasing the money supply because they feel it does nothing but increase the monetary base, believe that Japan's recent recovery is due not to the money supply, but to other factors.

Let's take a look at some of the alternative transmission mechanisms that money supply could go through to affect output....

* '''M+, Pe+, real i-, I+, Y+'''
Krugman's main argument: by announcing inflation and setting expected inflation, a sense of confidence will be placed back into the economy, and investment will increase.

'''Argument against:''' Inflationary expectations have, in the past, caused an enormous amount of speculation and are a cause for concern.  Stay safe, let the government help businesses recover, and people will start investing again.

* '''M+, Pstock+, q+, I+, Y+'''
We can see that because of an increase in the money supply, it has helped the Japanese stock market start to recover.  As a result, the market valuation of firms over the cost of capital has increased, meaning that investment will go up and so then will production.

'''Argumenet against:''' It is true that investment in businesses and production have gone up, and the stock market is starting to recover, but it is not because of an increase in the money supply.  Since the market crashed in the early 90's, the government has helped both banks and businesses repay there debts.  Because businesses stayed commited to overcoming there problems, and banks have fought through this tough time, Japan is starting to see economic growth again.

* '''M+, real i-, value of relative yen-, NX+, Y+'''
One of Japan's main sources for output is through exporting goods.  An increase in the money supply and inflation could make the yen less expensive relative to other currencies.  The end result is that Japanese products are cheaper relative to other goods and are therefore in demand.  As a result, output can increase.

'''Argument against:''' The main factor affecting Japanese exports is not the money supply, but the globalization of markets where factories and jobs have been outsourced to China.  As businesses in Japan strengthen, the amount of outsourcing will decrease and therefore Japan can take more credit for goods sent abroad.




During the long economic slump in Japan, the monetary policy seemed to focus on a very low interest rate around 1995 to a near zero interest rate in 1999 and worsening problems ever since.  The intent of the monetary policy has been to lower expectations of future interest rates.  In order to sitmulate the demand for goods and services.  But in a liquidity trap the solution is to raise future price expectations. 

[http://web.lexis-nexis.com/universe/document?_m=43b2869d9848a8e1901124627bc217bd&_docnum=16&wchp=dGLbVzz-zSkVA&_md5=16f67ea17eaa6350ef2c9e708961f355 Keynesian Source] [http://www.pkarchive.org Krugman Source] 


[[Japanese Liquidity Trap]]   [[What is the current status of the Japanese economy?]]