Abenomics and FDR

Perhaps the most noteworthy thing to happen in economic policymaking over the past several months is that the Bank of Japan and the Japanese government have decided to explicitly "coordinate" monetary and fiscal policy to end deflation. Many have started calling this "Abenomics" after the new Japanese Prime minister. The goal is to achieve an annual inflation of about 2 percent after many years of deflation. Host of actions have been outlined to achieve this end.

The policy statement about policy coordination was issued in January here.

And today more actions were outlined by the Bank of Japan here.

The motivation for these actions is clear. First, an increase in inflation expectation from deflationary expectation to inflationary ones will reduce real interest rate and thus make spending today more attractive relative to future spending. This should increase demand in a similar way monetary policy always does. Second, some healthy dose of inflation is likely to reduce the debt burden of borrowers, which may also help stimulate demand, especially in a severely depressed economy where some agents have piled up excessive amount of debt and need to "deleverage".

Interestingly enough very similar policy were tried in 1933 by Franklin D. Roosevelt (FDR) once he became President of the US. Most elements of the policy regime are the same, now as then, except that FDR promised a more sustained increase in the price level (he promised to reflate to pre-depression levels which implied quite a bit of inflation, see my 2008 paper here). My overall sense is that this element of the "New Deal" was a great success and helped generate a sharp recovery in 1933-37 (although these policies were abandoned during the "Mistake of 1937" leading to the second phase of the Great Depression). My guess is that the policy announced by the Japanese government will also be very helpful to stimulate growth. Perhaps my biggest worry is that the number, 2 percent inflation, is a bit on the low side. But we shall see ... I think the most important thing is that the government has made a priority of "reflation" just as FDR did and has been explicit -- just as he was-- that they will do whatever it takes to get there.

Below is an "advertisement" for inflation that was released following these policy innovation of FDR that we looked at in last class. You will see that the two key rationales for inflation both appear in the ad (the first channel is a key theme is much of my earlier work such as  here and in joint paper with Mike Woodford here, but the redistribution channel is studied in my paper with Paul Krugman here (Students in Advanced macro at Brown: All these papers are on the reading list for the class.)


The ad:

http://www.youtube.com/watch?v=JUvm9UgJBtg&feature=related