ABSTRACT
This chapter presents 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'. It explores a theoretical foundation of the proper policy prescription based on the policy mix of the fiscal and monetary policies. The chapter constructs a more elaborated formal macrodynamic model that can give some insight into the analysis and the policy prescription of the practical macroeconomic problems. The policy mix of fiscal and monetary policies that can stabilize the macroeconomic system is called 'permissible' policy mix. On the other hand, the policy mix that cannot stabilize the macroeconomic system is called 'impermissible' policy mix. The feedback mechanism suggests that the decrease of the government expenditure per capital stock g coexists with the increase of the public debt capital ratio when the system is dynamically unstable.
