Avoiding the deflation trap: three lessons from Japan

The recent difficulties in the American financial system and economy have reminded many observers of the Japanese experience after the collapse of the so-called "bubble economy" in the late 1980s. The collapse marked the start of near-meltdown in the Japanese financial system and a long-running economic stagnation that plagued Japan for more than a decade. What are the lessons that we can learn from this experience and the policy response?

There are three. First, the central bank should cut

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