Japanese Deflation in U.S.? Feds Must Watch Their Language

Paper cautions against extended term talk.

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816170_tire_punctureFederal Reserve Bank of St. Louis chief, James Bullard, tackles one popular economic prognostication: that the U.S. is about to spiral into a Japan-like period of deflation that could last for years. In this paper he analyzes potential long-term scenarios and concludes that Federal Open Market Committee could drive the U.S. to a Japanese conclusion with its “extended period language” – and on the up side, quantitative easing is the best way to avoid that.


In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years. To frame the discussion, I rely on an analysis that emphasizes two possible long-run outcomes (steady states) for the economy, one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data I consider seem to be quite consistent with the two steady state possibilities. I describe and critique seven stories that are told in monetary policy circles regarding this analysis. I emphasize two main conclusions: (1) The FOMC’s extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.

Download the full paper here.

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