This article is a bit outdated, but given the previous post’s argument that deflation has been a long term concern of Japan, I think that its arguments are still valid. It makes 4 counter-arguments against the premise that an aggressive monetary policy may be the solution to heavy deflation:
1. An expansionary monetary policy might allow people to pay their debts easier, but it disincentivizes both the private and public sector from balancing budgets. Shirikawa also argues that those without debts are incentivized to spend more, bring future demand to the present and increasing aggregate demand. This increase will diminish over time despite low interest.
2. The prolonged nature of shocks in China’s government might prompt companies to further invest in low interest investments that would only be profitable with aggressive monetary policy. This is an inefficient allocation of resources.
3. Flattening the yield too far will also cause inefficient allocation of resources and undermine profitability. Long term investments could yield negative returns.
4. Mr. Shirakawa’s fourth point is an argument about why banks such as fed should worry about the effect of easy policy of global commodity prices. In essence, he says that individual central banks that concentrate on domestic inflation targets that could end up causing global problems, which in turn make it hard to hit domestic inflationary targets.
The last point is rewritten from the site. It is what really confused me, and I think it’s really important. I would appreciate some input on explaining it to me.
From what I know of economics, an expansionary monetary policy to combat inflation seems textbook, but most of these counterpoints seem valid in this specific scenario.