Since the transition from the gold standard to the fiat monetary regime in the 1970s, both international and national financial markets have undergone substantial changes. Consequently, the role of money and finance has become a central catalyst for the development of the real economy. This dissertation addresses four key macroeconomic challenges faced by Japan and Europe from a monetary and financial perspective.
Chapter 2 deals with the role of Japan's persistent low-, zero- and negative-interest rate environment on commercial banks and the real economy. The development of the Japanese economy since the early 1990s has been shaped by the bursting of the Japanese bubble economy. Since then, the Bank of Japan has not only lowered the policy interest rate to unprecedented levels, but also implemented a series of unconventional monetary policy measures. Nevertheless, the long-term stagnation of the Japanese economy continued, with the Japanese commercial banks being under consolidation pressure. Chapter 2 examines how Japan’s persistent monetary easing has affected the banking system and their consequences for the real economy.
Chapter 3 focuses on Japan's decades-long struggle with low consumer price inflation. Despite the concerted efforts of monetary and fiscal expansions over more than three decades, the Japanese policymakers failed to produce consumer price inflation. Within Japanese policy and academic circles, skepticism has grown regarding Milton Friedman’s quantity theory on the money-price relationship. This skepticism led to the widespread belief that Japan's low inflation is not a monetary phenomenon, but a real economic phenomenon driven by structural problems, inter alia a rapidly aging society. Chapter 3 reveals the limitations of Friedman’s quantity theory of money from the viewpoint of the (original) quantity theory of money pioneered by Irving Fisher. Based on Fisher’s quantity theory of money, Chapter 3 shows that Japan’s prolonged low inflation is indeed a monetary phenomenon.
Chapter 4 addresses the development of intra-euro area current account imbalances. Historically, there has been a clear disparity in policy stances between northern and southern European countries. In particular, the uncoordinated fiscal policies within the euro area have played a central role for the development of international capital flows, which in turn influenced the current account dynamics within the euro area. Chapter 4 provides insights into the role of the common monetary policy and uncoordinated fiscal policies for the development of intra-euro area current account imbalances.
Chapter 5 turns attention to Germany’s persistent large current account surpluses which have been a frequent source of political conflicts in Europe and beyond. This chapter examines the causal relationship between the current account and financial account. To be specific, the impact of domestic capital outflows and foreign capital inflows on Germany’s current account surpluses. Evidence obtained from the Toda-Yamamoto causality model suggests that, for Germany, the causality runs from international capital flows (the financial account) to international real resource flows (the current account), and not vice versa.
In summary, this dissertation aims to analyze the interplay between macroeconomic policymaking and real economic phenomena from a monetary and financial perspective. It demonstrates that the monetary and financial developments driven by monetary and fiscal policies play a pivotal role for the real economic development. By focusing on Japan and Europe, this dissertation illuminates the underlying causes of several macroeconomic challenges from a financial and monetary viewpoint, offering valuable insights for policymakers, academics and practitioners.:Table of Contents
Chapter 1 5
Introduction 5
Chapter 2 7
The Japanese Banks in the Lasting Low-, Zero- and Negative-Interest Rate Environment 7
1. Introduction 7
2. The Origin and the Macroeconomic Environment of the Persistent Banking Crisis 8
2.1. The Japanese Bubble Economy 8
2.2. Macroeconomic Responses to the Lasting Crisis 9
2.3. Credit Guarantees and Public Credit 10
3. Development of the Japanese Banking Sector in the Persistent Crisis 11
3.1. Credit Crunch and Increasing Deposits 11
3.2. Interest Margins 12
3.3. Net Interest Income 14
4. Adjustment to Declining Net Interest Incomes 15
4.1. New Business Models, Increasing Fees and Commissions 15
4.2. Cost Reductions 17
4.3. Mergers 17
5. Outlook 18
Chapter 3 22
Japan’s Low Inflation from a Quantity Theory Perspective 22
1. Introduction 22
2. The Quantity of Money in Japan 23
2.1. Definition of Money 23
2.2. Money Creation and Banking Sector 26
2.3. Money Creation and Nonbanking Sector 28
3. Two Versions of the Quantity Theory of Money 30
3.1. From the Transactions Version to the Income Version 30
3.2. Problems with the Income Version 32
3.3. The Quantity Theory of Money and the Japanese Economy 33
4. Transactions Version of the Quantity Theory of Money and Japan’s Low Inflation 36
4.1. The Quantity of Money and the General Price Level in Japan 36
4.2. Japan’s Low Money Growth from Private and Government Debt Perspective 39
4.3. Japan’s Low Money Growth and Inflation from Macroeconomic Policy Perspective 41
5. Outlook for Japan’s Inflation from a Quantity Theory Perspective 44
Chapter 4 55
Macroeconomic Policy Making and Current Account Imbalances in the Euro Area 55
1. Introduction 55
2. Pre-Crisis Divergence of Fiscal Policies and Current Account Imbalances 56
2.1. German Reforms as an Asymmetric Shock for the Euro Area 58
2.2. Current Account Deficits in the Southern Euro Area and Beyond 61
3. Crisis, Emergency Credit and Fiscal Rescue Packages 64
3.1. Monetary Rescue Measures 64
3.2. Fiscal Rescue Funds 68
4. Post-crisis Macroeconomic Policy Mix 70
4.1. Fiscal and Monetary Policy Mix 70
4.2. ECB Unconventional Monetary Policy 72
5. Post-crisis Macroeconomic Policy Mix 76
Chapter 5 82
The Relationship between the German Current Account and Financial Account: Evidence from Toda-Yamamoto Causality Approach 82
1. Introduction 82
2. The Relationship between the Current Account and Financial Account 83
2.1. Recording of Balance-of-Payments Transactions 83
2.2. Standard Approaches to the Current Account Determination 84
2.3. Gross Capital Flow Approach 86
3. Empirical Analysis 87
3.1. Data Description and Estimation Procedure 87
3.2. Model Description and Results of Unit Root and Cointegration Tests 89
3.3. Results of Toda-Yamamoto Test for Multivariate Granger Causality 92
4. The German Current Account Surplus from a Gross Capital Flow Perspective 94
4.1. Bonanzas of Foreign Capital Inflows and Current Account Deficits in the 1990s 94
4.2. Surges of German Capital Outflows, Stops of Foreign Capital Inflows and Current Account Surpluses in the early 2000s 97
4.3. Gross Capital Flows and Persistent Current Account Surpluses from the late 2000s 100
5. Outlook 10
