Expectations of deflation raise the real interest rate

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With nominal interest rates at zero, expectations of deflation raise the real interest rate. Japan has faced the zero-bound-deflation problem for many years. Plot since 2000 the nominal interest rate on Japanese Treasury bills (FRED code: INTGSTJPM193N), the inflation rate based on the percent change from a year ago of Japan’s consumer price index (FRED code: JPNCPIALLMINMEI), and an estimate of the real interest rate based on the difference between these two indicators. Comment on the risks that deflation poses in an economy with a zero nominal interest rates.

Reference no: EM131459885

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