Question

How does the experience of Japan during the "two lost decades" lend support to the four lessons for monetary policy outlined in this chapter?

Short answer

The four lessons of monetary policy were bolstered by Japan's experience during "two lost decades." The "Two Lost Decades" alludes to the Japanese economy's deflation in the $1990$s

Step-by-step solution

Step 1. Concept of monetary policy 

The method through which a country's central bank controls the monetary base to ensure price stability and public confidence in the currency is known as monetary policy.

Step 2. Explanation

The following four monetary policy lessons are directly influenced by Japan's experience:

The first lesson to be learned from Japan's experience is that it is dangerous to believe that monetary policy will be eased simply by lowering interest rates.

The second lesson advises that, rather than focusing just on short-term debt instruments, greater attention should be directed to alternative assets in order to stimulate the economy sooner.

The final takeaway from Japan's experience was that even with zero short-term interest rates, it is still possible to be effective.

The final takeaway from the experience was that unanticipated price changes in the economy should be avoided.