6/11/11

Krugman on the effect of quantitative easing in Japan

Paul Krugman shows in this post that the original quantitative easing (QE) in Japan did not help at all. Money supply did not react to an artificial increase in the monetary base. This observation raises a question on the effectiveness of a similar monetary policy in the U.S.

We have a simple explanation of the observed insensitivity of price inflation on QE:  inflation depends on the change in labor force, LF, not on monetary policy. The following models for the GDP deflator, DGDP, and CPI inflation, CPI, were obtained and presented in our previous posts:

DGDP(t) = 1.9d(lnLF(t))/dt – 0.0084      

CPI(t) = 1.3d(lnLF(t))/dt + 0.0004

Two figures below illustarte these models. There is no room for the BOJ to influence deflation after 1995.  

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