ABSTRACT
The purpose of this chapter is to present a formal macrodynamic model that can contribute to the theoretical interpretation of the ‘deflationary depression’ of the Japanese economy in the 1990s and the 2000s during such a long period of twenty years, called the ‘lost twenty years’, and to present a theoretical foundation of the proper policy prescription based on the policy mix of the fiscal and monetary policies. We hope that the model that is presented in this chapter will provide some insight to the theoretical interpretation and the policy prescription of the recent economic crises of other countries, such as the USA and European countries, as well as Japan. Before constructing the theoretical model, we shall consider the main macroeconomic data of the Japanese economy during the period from the 1980s to the 2000s, which seem quite paradoxical at first glance. In fact, Figures 6.1-6.5 summarize the empirical ‘stylized facts’ of the Japanese economy.
