Japan Money Market Analysis: Monetary Policy Effectiveness in the 1990s
Overview
This paper analyzes Japan's expansionary monetary policy in the 1990s using IS/LM framework to explain why the policy failed to significantly increase income. The analysis demonstrates that low investment responsiveness to interest rates and low money demand responsiveness to income were the primary behavioral factors limiting policy effectiveness.
What this coursework covers
- Introduction to Japan's 1990s monetary policy and key behavioral assumptions
- IS/LM model framework with fundamental equations for equilibrium analysis
- Explanation of how low investment responsiveness constrains monetary policy effectiveness
- Summary linking investment-interest rate insensitivity to limited income growth
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Japan Money Market Analysis
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Japan Money Market Analysis
Japan pursued an expansionary monetary policy in the 1990s. There are assumptions which were put in place to make it effective. According to experts, the two most significant behavioral assumptions to be considered included the responsiveness of the monetary demand versus the income € is small and the responsiveness of the existing investments to interest rates (d) is also small. In relation to these assumptions, the inability of the policy to critically increase income can be expounded by utilizing the second assumption that the responsiveness of the existing investments to interest rates is minor. Therefore, it is evident that with even a significantly large from in real interest rates, there is insignificant change in the investments existing. Eventually, these all results in a little change in the income.
Utilizing the IS/LM model, an IS curve can be created which would show the combinations of the interest rates and the output levels which meet the conditions of the equilibrium position in the market. Therefore, to incorporate the IS curve, the fundamental equation that would be used is:
Y = C(Y - T) + I(r) + G
Y represents the output, C is the marginal value of the propensity to income while T is the taxes. I represents investment, r the rate of interest and G is the government spending.