Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis

Gunther Schnabl

Juni 2015

Abstract

Japan experienced a boom-and-bust cycle in the real estate and stock markets almost 20 years earlier than Europe. Since the bursting of the Japanese bubble economy, the country has fallen into a deep recession and has experimented with crisis therapies in the form of unconventional monetary expansion, Keynesian fiscal stimulus, and recapitalization of financial institutions. Japan reached a low interest rate environment in the mid 1990s and has accumulated an exceptionally high level of public debt during more than two decades of economic stagnation. This paper compares the boom-and-bust cycles in Japan and Europe with respect to the reasons for excessive booms, the characteristics of the crises, and the (potential) effects of the crisis therapies. It is argued that in both Japan and Europe the consequences of expansionary monetary and fiscal policies include the hysteresis of a low-interest rate and high government debt environment, the erosion of the allocation and signaling functions of the interest rate, the gradual quasi-nationalization of financial institutions, as well as gradual real income losses. The economic policy implication for Europe and Japan is the timely exit from crisis therapies in the form of excessively expansionary monetary and fiscal policies.

Keywords: , , , , , , , , , , , , .

JEL Codes: , , , , , , .

Erschienen in

Asian Economic Papers, Volume 14, Issue 1, pp 124-150.

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Externally Imposed Financial Repression, Conflicted Internationalisation of the Renminbi and External Balancing via Wage Adjustment

Gunther Schnabl

Januar 2015

Abstract

China has made several important steps to liberalise its domestic financial markets and to open up its capital markets internationally in order to promote the renminbi as an international currency. To make the renminbi a convertible, freely floating international currency is a pre-requisite for the renminbi to challenge the dollar as an international currency. The chapter shows, however, that the very benign liquidity conditions in the US, combined with very large foreign currency denominated assets, constitute an insurmountable impediment for the floating and the internationalisation of the renminbi. With exchange-rate stability being seen as an important determinant of macroeconomic stability and growth in China (and East Asia), domestic-wage increases are proposed in order to reduce the appreciation pressure on the Chinese currency.

Keywords: , , , , .

Erschienen in

Rövekamp F., Bälz M., Hilpert H. (eds) Central Banking and Financial Stability in East Asia. Financial and Monetary Policy Studies, vol 40. Springer, Cham.

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