Former Bank of Japan governor challenges the current monetary policy consensus

In Bill Mitchell's blog today:

In the latest IMF Finance and Development journal (March 2023), there is an interesting article by the former governor of the Bank of Japan, Masaaki Shirakawa - "It's time to rethink the foundation and framework of monetary policy". It goes to the heart of the complete confusion that is now being demonstrated by central bank policy makers. With their 'one trick pony' interest rate attacks on inflation, not only have they been inconsequential in dealing with that target (the so-called price stability responsibility), but, in failing there, they have undermined the achievement of the other central bank target (financial stability) and probably worsened the chances of sustaining the third target (full employment). Sounds like a mess - and it is. We are witnessing what happens when Groupthink finally takes over an academic discipline and the policy making space. Blind, unidirectional policies, based on a failed framework, steadily undermining all the major goals - that is where we are right now. And not unsurprisingly, those who have previously preached the doctrine are now crossing the line and joining with those who predicted this mess. And, as usual, the renegade position is somehow recast as we knew it all along’ when, of course, they didn't.​

Bill writes that monetary policy doen't work, anywhere; and fiscal policy does work, at least in Japan.

He goes on to say,

Dare mention the idea that governments should use fiscal policy to reduce unemployment or provide cash transfers to the poor to lift them out of poverty and the screams were/is deafening. All the noise about insolvency, skyrocketing interest rates, bond market retaliation, inflation and intergenerational debt burdens reached/reaches crescendos whenever that sort of fiscal policy use was/is suggested. But enter a bank in trouble and the fiscal largesse in the trillions can’t get out the door quickly enough.
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https://billmitchell.org/blog/?p=60731#comment-126195

In my opinion, trying to keep interest rates down in an economy is a very inefficient economic tool. It is expensive to try to keep interest rates down, and very expensive. It creates inflation (or at least inflationary pressure).

Maybe a more targeted approach might be better, like programs making lower interest rate loans to certain segments of the economy.


For those not aware, it costs a lot of money for a Central Bank (such as "the Fed", in the U.S.) to try to keep holding rates down, especially in the face of inflationary pressures. This creates even more inflationary pressure.

(explanation: reason it "costs money" and is "expensive" is because the main way they "lower interest rates" is by making out loans, at an interest rate below what the market interest rate is)

In other words, the difference between the interest rates the Central Bank is trying to set and the interest rates that the free market wants - which is itself very much influenced by the inflation rate - is going to add to the inflation rate.

If the Fed is trying to hold down the interest rate, that will create inflation. And then if the Fed continues to try to hold down the interest rate when there is already lots of inflation, that will create exponential inflation. Sort of like a death spiral.

So there is going to be pressure on the Fed to have to raise rates. It's not all just something that the Central Bank will just be able to "choose".


According to the Keynesian theory of economics, government should spend more during the bad times, and spend less during the better times.

The problem is, the U.S. did not cut spending or save during the better times. This is going to make it more difficult to increase government spending during bad times. The U.S. already has an inflation problem. It is going to get worse if the country is going to try to increase spending to try to counter an economic downturn... and nearly impossible if that economic downturn is being itself fueled by inflation.

The country's debt is so high right now that if the U.S. continues to borrow more money, most of that borrowed money is going to just turn into inflation. The Federal Reserve has been the one printing more money to loan to the Treasury. You're not going to find too many private lenders when there is already such a massive amount of government debt in the marketplace already and inflation has gone up.