Opening Remarks
by Haruhiko Kuroda,
Governor of the Bank of Japan

I. Introduction
Good morning. I am honored to welcome such distinguished guests to the 23rd BOJIMES Conference. On behalf of the conference organizers, I thank all the guests in thisroom, in particular those who travelled a long distance to participate in this one-and-ahalf-day conference in Tokyo.
This year’s conference is titled “Monetary Policy: Lessons Learned and Challenges
Ahead.” After my remarks, Mr. Ben Bernanke, former U.S. Fed Chair, will deliver theMayekawa Lecture based on his experience as an academic researcher and a monetary
policy maker. In the afternoon, Professor Mark Gertler, our Honorary Adviser toIMES, will give the keynote speech. Tomorrow, a policy panel session will conclude
the program with three panelists, Mr. Charles Evans from the Chicago Fed, Mr. Frank
Smets from the European Central Bank, and my colleague at the Bank of Japan,
Hiroshi Nakaso. The panel session will be moderated by Professor Marvin
Goodfriend, the other Honorary Adviser to IMES. In addition, I am pleased tohave three leading economists to present their papers, addressing timely and important
issues at the frontier of monetary economics and monetary policy making. I amconfident that we will all learn a lot during the conference.

II. Three Research Questions at the Top of the Agenda
In my opening remarks, I would just like to deliver a sneak peek of this year’s conference by pointing out three major research topics on our agenda.
A. Inflation and Its Expectations Dynamics
Since the introduction of “Quantitative and Qualitative Monetary Easing (QQE)” inApril 2013, raising inflation expectations to anchor them at the price stability targetof 2 percent has been a crucial element of the Bank of Japan’s monetary policy management. In September 2016, the Bank published a comprehensive assessment of thepolicy eﬀects of QQE and other policy measures, including the negative interest rate
policy. As companion papers of the comprehensive assessment, the Bank of Japan also
published several empirical studies exploring the characteristics of inflation expectations in Japan and comparing them with those in other advanced economies.1 Thosestudies included an analytical framework developed by Mr. Jeﬀrey Fuhrer from theBoston Fed, one of today’s paper presenters, to assess inflation dynamics with a spe................................
1. Bank of Japan (2016) and Nishino et al. (2016).

MONETARY AND ECONOMIC STUDIES / NOVEMBER 2017
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION

17

cial focus on the role of survey-based expectations.2
I am sure that we have learned a lot about inflation expectations in the past fewyears, but there still remain many research questions on this issue yet to be addressed.
For example, there seems to be a consensus that inflation expectations exhibit a certain
degree of inertia or persistence, which is diﬃcult to be explained in a full information
rational expectations (FIRE) framework even with the classic assumption of nominal (price) rigidity. However, little consensus has been formed regarding the microfoundations for such seemingly persistent inflation expectations dynamics. Against
this backdrop, recent studies have increasingly focused on information rigidity, and I
would like to encourage researchers to move on further along with this research agenda.
B. The Natural Rate of Interest
The second item on our research agenda is an old and new topic, that is, the naturalrate of interest, or, in slightly more technical parlance, the equilibrium real interest rate.
The natural rate of interest has long been discussed in macroeconomics and related timeseries analyses.
If we say “our monetary policy stance remains accommodative,” this means that
actual real interest rates are kept at a level below the equilibrium real interest rate.
This quite naturally gives rise to the question that how we can know the level of theequilibrium real interest rate. This question is more diﬃcult than it appears. The
natural rate of interest would have a clear interpretation in a solid dynamic generalequilibrium model. Nevertheless, the determinants of the natural rate of interest vary,depending on how the model is specified. It is well known that, in some specific cases,
the natural rate of interest coincides with the potential growth rate of the economy,
but this is not always the case. Further, when trying to estimate the natural rate ofinterest, econometricians face a long list of technical challenges. For example, dataon the risk-free interest rate with a fixed maturity are not readily available, since there
is no absolutely “risk-free” asset in actual financial markets. Also, consumers’ time
preferences are hard to estimate, and, moreover, whose time preference we should
estimate still remains an unresolved question.
With the diﬃculties just mentioned in mind, central bankers have long made careful policy decisions using some kinds of estimates of the natural rate of interest. Thestakes have become even higher in recent years when central banks try to estimate thenatural rate of interest. As seen in the debate on the Secular Stagnation hypothesis
proposed by Professor Lawrence Summers of Harvard University, uncertainty regarding the natural rate of interest makes it much more diﬃcult for central banks to steer aclear course in terms of policy decisions.3 While I am not going into the details of hishypothesis, many of us can agree that the natural rate of interest has declined in recentyears and because of this decline, combined with the eﬀective lower bound on nominalinterest rates, many central banks in advanced economies developed new unconventional monetary policy tools and have embarked on carefully crafted but bold actions.
In this regard, I would argue that we still face old challenges.
................................
2. Fuhrer (2012).
3. Summers (2013, 2015).

18 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2017

Opening Remarks

C. Heterogeneous Agent Macroeconomics and Distributional Eﬀects of Monetary
PolicyThe third issue is related to monetary policy and inequality. The order I picked thetopics does not necessarily correspond to their importance; it is simply that the first
two topics are closely related to the real interest rate, while the third topic deals with avery diﬀerent issue.
As a caveat, I would like to clearly state that monetary policy is by no means a policy tool for distributional purposes. With this proviso in mind, let me borrow a phrasedelivered by U.S. Fed Chair Janet Yellen: She said, “it is important for policymakers to understand and monitor the eﬀects of macroeconomic developments on diﬀerent
groups within society,” and I completely agree with her on this point.4
In the aftermath of the global financial crisis, a number of pundits argued thatmacroeconomics and monetary economics are totally useless. One of the misconceptions of such critics is that they believe that modern macroeconomics relies only on
representative agent models and ignores important implications arising from various
heterogeneities in the economy, such as debtors and creditors, the financial sector andthe non-financial sector, importers and exporters, and more controversially, haves andhave-nots. Heterogeneous agent models were developed in the 1990s, and have been
extended since then.5 From the viewpoint of policymakers, the true issue is whether to
employ heterogeneous agent models, instead of handier representative agent models,
to examine the implications of heterogeneity for macroeconomic fluctuations. This is aclassic case in which Occam’s razor with regard to the choice of the appropriate model
applies.
This question remains yet to be explored in full depth. We know that increasing
attention is being paid to the distributional eﬀects of economic and other public policies. I would like to reiterate that, under such circumstances, monetary policy is not atool that is well suited for dealing with inequality or polarization and that central banks
should remain focused on the aggregate implications of their own policy decisions. Atthe same time, however, this does not mean that central banks are allowed to ignore thedistributional eﬀects of monetary policy, especially if the distributional eﬀects have anaggregate impact. With this aim, central banks should be, and in fact are, open to learning about heterogeneous agent macroeconomics. These days, much progress has been
made on this front in computational economics. Central banks are keenly following
the technical progress and will keep abreast with the pioneers on this front as well.

III. The Way Ahead
We are now about to start the 23rd BOJ-IMES Conference, which has a history of morethan a quarter-century. This year’s conference is organized so that discussions can revolve around the three major topics that I mentioned in these opening remarks. Nearlyten years ago, Professor Maurice Obstfeld, currently Chief Economist of the IMF andthen-Honorary Adviser to IMES, in this room identified the BOJ-IMES Conference as................................
4. Yellen (2016).
5. Krusell and Smith (1998).

19

“a venue in which abstract monetary theory and practical policy questions can comfortably be discussed in full depth and side by side.” I regard his remark as a greatcompliment to this conference. I am convinced that this year’s conference will produce further insights into more eﬀective central bank policymaking, in a same manneras previous conferences.
Thank you.

20 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2017

Opening Remarks

References
Bank of Japan, “Comprehensive Assessment: Developments in Economic Activity and Prices aswell as Policy Eﬀects since the Introduction of Quantitative and Qualitative Monetary Easing(QQE),” Bank of Japan, 2016.
Fuhrer, Jeﬀrey, “The Role of Expectations in Inflation Dynamics,” International Journal of CentralBanking, 8(S1), 2012, pp. 137–165.
Krusell, Per, and Anthony A. Smith, Jr., “Income and Wealth Heterogeneity in the Macroeconomy,”
Journal of Political Economy, 106(5), 1998, pp. 867–896.
Nishino, Kousuke, Hiroki Yamamoto, Jun Kitahara, and Takashi Nagahata, “Supplementary Paper Series for the ‘Comprehensive Assessment’ (1): Developments in Inflation Expectations
over the Three Years since the Introduction of Quantitative and Qualitative Monetary Easing(QQE),” Bank of Japan Review, No. 2016-E-13, Bank of Japan, 2016.
Summers, Lawrence H., remarks at the IMF Fourteenth Annual Research Conference inHonor of Stanley Fischer, Washington, DC, 2013 (available at http://larrysummers.com/
imf-fourteenth-annual-research-conference-in-honor-of-stanley-fischer/, accessed June 6,2017).
, “Demand Side Secular Stagnation,” American Economic Review, 105(5), 2015, pp. 60–65.
Yellen, Janet L., “Macroeconomic Research After the Crisis,” speech at the 60th Annual Economic
Conference Sponsored by the Federal Reserve Bank of Boston, 2016 (available at https://www.federalreserve.gov/newsevents/speech/yellen20161014a.htm, accessed June 6, 2017).

2122 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2017