Policy normalisation may cause economic contraction – BoJ study
Effects greater under less credible forward guidance, central bank researchers find
Policy normalisation could cause Japan’s economy to contract, new research from the country’s central bank finds.
The study, published today (February 24) by the Bank of Japan Institute for Monetary and Economic Studies, finds that a prolonged period of low interest rates causes market participants to perceive the neutral policy rate to be lower. When interest rates begin to rise, market participants correct their estimation of the neutral rate and this precipitates a downturn.
The authors –
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