A year and a half after the Japanese government introduced its first fiscal stimulus, the yield curve (10-year Japanese government bond yields minus the discount rate) had steepened by nearly 2 percentage points. If the BoJ [Bank of Japan] had simultaneously initiated a policy of quantitative easing and stopped the yield curve from steepening, deflation could have been averted. Real gross domestic product would have been 8 per cent higher than where it is now.
I am very sympathetic to one of the main points of Turner's article, which is that the short-term risk-free interest rate that is manipulated by central banks is not the most important interest rate in the economy. On the other hand, I am very unsympathetic to the other main point, which is that the central bank can easily manipulate the term premium (the difference between long rates and short rates) and the risk premium (the difference between the rates on private securities and government securities). My views are summarized by the question, Can Greenspan Steer?
For Discussion. Stephen Kirchner says that Turner "has a misplaced faith in the efficacy of discretionary macro policy at the expense of structural reform." Is there a way to distinguish empirically between insufficient monetary stimulus and the need for structural reform as causes of bad macroeconomic performance?