Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s

We investigated, empirically, why Japanese banks held excess reserves in the late 1990s. Specifically, we pin down two factors explaining the demand for excess reserves: a low short-term interest rate, or call rate, and the fragile financial health of banks. The virtually zero call rate increased the demand for excess reserves substantially, and a high bad loans ratio largely contributed to the increase in excess reserve holdings. We found that the holdings of excess reserves would fall by two-thirds if the call rate were to be raised to its level prior to the adoption of the zero-interest-rate policy, and the bad loans ratio were to fall by 50%.     

LOCATION OF PUBLIC FIRM IN THE PRESENCE OF MULTINATIONAL FIRM: A MIXED DUOPOLY APPROACH*

By incorporating a multinational private firm into the mixed duopoly model with Hotelling‐type spatial competition, we show that the private firm's nationality is a matter of the public firm's location. As the share of foreign capital increases in the private (multinational) firm, the public firm moves to a central place. The effects of price regulation and sequential location choice are also discussed.     

Growth and Public Debt: What Are the Relevant Trade‐Offs?

The interplay between growth and public debt is addressed considering a Barro‐type (1990) endogenous growth model where public spendings are financed through taxes on income and public debt. The government has a target level of public debt relative to GDP, and the long‐run debt‐to‐GDP ratio is used as a policy parameter. We show that when debt is a large enough proportion of GDP, two distinct balanced‐growth paths (BGPs) may coexist, one being indeterminate. We exhibit two types of important trade‐offs associated with self‐fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the debt‐to‐GDP ratio while the highest one is increasing. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, local and global indeterminacy may arise and self‐fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth, welfare, and macroeconomic fluctuations. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.     

Japan's Deflation and the Bank of Japan's Experience with Nontraditional Monetary Policy

This paper offers a brief summary of nontraditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period 1998–2006, when the so‐called zero interest rate policy (ZIRP) and quantitative easing (QE) were put in place. The paper begins with a typology of policies usable at low interest and inflation rates. They are: strategy (i), management of expectations about future policy rates; strategy (ii), targeted asset purchases; and strategy (iii), QE. Alternatively, QE may be decomposed into a pure attempt to inflate the central bank balance sheet, QE0, purchases of assets in dysfunctional markets, QE1, and purchases of assets to generate portfolio rebalancing, QE2. Strategy (ii), when nonsterilized, is either QE1 or QE2. Using this typology, I review the measures adopted by the BOJ and discuss evidence on the effectiveness of the measures. The broad conclusion is that strategies (i) and (ii) have affected interest rates, while no clear evidence exists so far of the effectiveness of the pure form of strategy (iii), or QE0. Strategy (ii) has been effective especially in containing risk/liquidity premiums in dysfunctional money markets; that is, QE1 has been effective. The effectiveness of QE2, however, is less clear‐cut. The strategies, however, have failed to bring the Japanese economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation.     

ON THE ROBUSTNESS OF PRIVATE LEADERSHIP IN MIXED DUOPOLY

We investigate a mixed duopoly where a state‐owned public enterprise competes against a profit‐maximising private enterprise. We analyse whether private leadership or public leadership is robust in the observable delay game. We find that private leadership is always risk dominant. We also investigate how ownership structure in a public firm affects the equilibrium distribution of roles. We find that the roles are as follows: (1) Cournot, when the degree of privatisation is low, (2) private leadership, when it is middle, (3) both private leadership and public leadership, when it is high. The result implies that private leadership is again more robust.     

DUALITY WITH SECTOR‐SPECIFIC EXTERNALITIES UNDER SOCIAL CONSTANT RETURNS*

We develop dual approaches to quantity and price relationships of production in a general multisectoral model with sector‐specific externalities. The production of each good exhibits socially constant returns to scale but privately decreasing returns. We find that the Stolper‐Samuelson theorem holds for factor intensity ranking from the social perspective and that the Rybczynski theorem holds for factor intensity ranking from the private perspective. The price‐output dual fails to hold in general. Moreover, we re‐establish the Heckscher‐Ohlin theorem in the two‐sector case, as well as the factor endowment–factor price and price‐output comparative statics in the high‐dimension case under proper conditions.