Friday, June 13, 2014

Is this what Noah Smith is referring to?

Noah Smith wrote a piece for Bloomberg View:
[Shinzo Abe] went the opposite direction of Europe, and -- unlike the U.S. -- he gave every indication that the shift toward monetarism was permanent. The result: Japan has escaped deflation.

It took me awhile to track down the deflation victory point (it's not yet in the data from FRED):

See it? It's the one point at the end above the 1-sigma model error band from April 2014. It is actually quite remarkable (a 2-sigma jump), and for the sake of the people of Japan I hope it holds up. I mentioned in an earlier post that this rise over the past few months could be due to the impact of fiscal policy. Before someone says I scaled the axes to make the jump look small, note that the US CPI traversed the entire range in the same time period (2% inflation would take you from 0.9 in 1994 to 1.1 in 2014).

A jump in CPI due to monetary policy should affect interest rates, but nothing remarkable seems to be happening. Interest rates are low given the model result (again 1-sigma error band shown):


  1. Jason, thanks for taking a look at this... I was going to ask you.

  2. ". and for the sake of the people of Japan I hope it holds up."

    Once they really get inflation nobody will want to roll over their bonds and the central bank will be forced to buy bonds like crazy so the government has enough money to pay off the bonds coming due and also keep spending twice what they get in taxes. This gives them the hyperinflation path in your model, where they are forced to monetize like crazy. This means hyperinflation. It will not be good for the people of Japan.


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