Kohei Hasui

This paper examines how the Bank of Japan (BOJ)’s ``Inflation-Overshooting Commitment'' and cost-push shocks contributed to its exit from a liquidity trap during 2024‒2025. To this end, we use a New Keynesian model incorporating shocks to demand and inflation, along with simple monetary policy rules. Our simulations show that such rules, especially those that maintain a zero interest rate even amid high inflation after 2021, can significantly elevate inflation. Under a price-level targeting rule, inflation exceeds 2 percent, while the average inflation targeting rule stabilizes inflation close to 2 percent over an extended period. These findings indicate that both policy commitment and cost-push shocks played a quantitative role in raising inflation and widening the output gap, ultimately facilitating the BOJ’s exit policy.

This paper shows that the recent Fed's exit strategy reflects the conduct of optimal monetary policy in a liquidity trap. We use the conventional new Keynesian model for the U.S economy, incorporating recent inflation persistence. As observed in the Fed's liftoff policy, optimal monetary policy shows inflation overshooting and prolonged zero interest rate policy under high inflation beyond the 2 percent target. With greater persistence of inflation, inflation overshooting becomes larger, yielding better consistency with the data. Our analysis also indicates the presence of a forward guidance puzzle in the Fed's exit policy. Under optimal monetary policy, the discounted Euler equation successfully dampens forward guidance effects and better describes the output gap.

This paper shows (1) a positive analysis demonstrating that recent high inflation rates can be explained by the Bank of Japan (BOJ)’s monetary policy for the COVID-19 pandemic period, “Inflation-Overshooting Commitment,” and (2) a normative analysis showing that the BOJ’s inflation-overshooting commitment aligns with the optimal monetary policy in a liquidity trap within a new Keynesian model with inflation persistence. In detail, we calibrate a hybrid new Keynesian model by Japanese parameters and show optimal monetary policy under commitment. Optimal monetary policy prolongs the zero interest rate until the second quarter of 2024 even after inflation rates overshoot 2 percent. Similarly, the BOJ continues the zero interest rate policy until the second quarter of 2024. The current average inflation rates from 2023Q4 to 2024Q3 reach 2.6 percent and 2.5 percent in the data and the model, respectively. Our conclusion holds for a variety of situations with Japanese parameters, such as a low output gap response to the real interest rate, discounted IS curve, alternative inflation persistences, interest-rate smoothing for the policy rate, an alternative specification of the Phillips curve, inflation target, and low/high anchored inflation expectations and natural interest rates.

Recent monetary policy analyses show the profound implications of progressive taxation for monetary policy. This paper investigates how progressive taxation on labor income changes the effect of model uncertainty by introducing robust control. We obtained the following results: (i) Higher progressive taxation decreases the effect of model uncertainty on the inflation rate, output gap, and interest rate. (ii) A sufficiently higher progressive taxation brings the economy into the determinate equilibrium even if the model uncertainty is strong. According to these results, we conclude that progressive taxation on labor income is effective in mitigating the effects of model uncertainty in terms of variance and equilibrium determinacy.