of land, because of the large weight of land value in the national wealth ; it is about half of national wealth, and the proportion of land value for residential use is about four times larger than the value of dwellings in 2005. despite these shortcomings, it may be useful to carry out a model simulation of the balanced path to show the deviation of the observed depi from the model simulation outcome. furthermore, it seems to be important to observe directly the price of land, and examine the factors and sources of price movements, to draw useful information for monetary policy implementation. land as collateral 7. one of the important differences between housing and other durable goods is that the use of land is essential for producing housing services. in the case of japan, the value of land accounts for a larger share in residential property and the national wealth than in other advanced economies. land has been employed as the most important collateral for bank lending. it also constitutes one of the most popular properties for inheritance, due to the lower effective tax rate applied to land holdings than to other assets. 8. some economists have argued that the japanese bank - dominated financial system was based on the " land standard " during the " high growth era ", because of the importance of land as collateral. the price of land in japan had increased persistently in the period from the 1950s to the bursting of the land - price bubble in the early 1990s, with a short interruption in the mid - 1970s ( figure 4 ). the price of land has often deviated from the fundamental price, due to the lack of information, high transaction costs and the mistaken perception of land as an asset of ever - increasing value. the total land value became five times larger than nominal gdp at the peak of the bubble period ( figure 5 ), despite the fact that the historical average of the ratio is about 2. in addition, the insight derived from the neoclassical growth model, including land as a production factor, indicates a much lower ratio ( iwata and hattori ( 2003 ) ). 4 asset price bubble and option theory 9. an asset price bubble will emerge through the financial accelerator mechanism based on various frictions and the incompleteness on the financial market, combined with the excessive provision of liquidity and the euphoria brought about by expectations of higher the steady state ratio of total land value to nominal gdp can be expressed as the product of the time preference rate, the expected population growth rate and the share of land rent in national income. given the

and a tightening of labor market conditions. we must recall that behind the aggressive risk - taking in the latter half of the 1980s there was the market perception of long - sustained low interest rates for the future under price stability. it may be useful to carry out an exercise to demonstrate the consequences of long - sustained low interest rates and the financial imbalance on the future development of economic activity and prices. this may further clarify the role and merits of the two perspectives in our new policy framework. references [ 1 ] alchian, a., and b. klein, " on a correct measure of inflation, " journal of money, credit and banking, february 1973, pp. 173 - 191. [ 2 ] bernanke, b., and m. gertler, " monetary policy and asset price volatility, " economic review, federal reserve bank of kansas city, fourth quarter, 1999. [ 3 ] eiglsperger, m., " the treatment of owner - occupied housing in the harmonized index of consumer prices, " ifc bulletin, no. 24, august 2006, pp. 68 - 79. [ 4 ] fisher, i., " nature of capital and income, " new york, 1906. [ 5 ] giavazzi, f., and f. mishkin, " an evaluation of swedish monetary policy between 1995 and 2005, " report published by the riksdag ( swedish parliament ) committee on finance, 2006. [ 6 ] girouard, n., m. kennedy, p. noord and c. andre, " recent house price developments : the role of fundamentals, " economics department working papers no. 475, oecd, 2006. [ 7 ] hayek, f. a., " full employment at any price? " the institute of economic affairs, 1975. [ 8 ] iwata, k., " budgetary balance, aging, and external balance : the future of the united states - japan external imbalance, " journal of the japanese and international economies, vol. 5, 1991, pp. 473 - 497. [ 9 ] iwata, k, " stock economy and the tax system, " ( ed. ) yukio noguchi, economic analysis of stock economy, nihon keizai shimbunsha, 1992 ( in japanese ). [ 10 ] iwata, k., " the role of money and monetary policy in japan,