Why deflation continues under extraordinary monetary expansion? Comments and views on Shimizu
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Professor Shimizu’s policy proposal is quite reasonable, given that the changes in the velocity of money are exogenous and stable. Observing the monetary policy in Japan for the last three decades, we have a question whether the velocity is exogenous or endogenous. If the velocity decreases endogenously in response to an additional monetary easing, it may be difficult to escape from deflation. We propose a theoretical argument of a new rational expectations’ equilibrium hypothesis in the intergenerational economy, where each generation is intergenerationaly altruistic and rational. The intergenerationaly rational expectations’ equilibrium implies that deflation can continue under an extreme increase in money supply.
KeywordsMonetary easing Velocity of money Deflation Intergenerational rationality
JEL ClassificationE30 E40 E50
The author is grateful to Yoshinori Shimizu and a referee for their helpful discussions and comments.
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