ABSTRACT This study addresses the role of monetary and fiscal policy stances in inflation dynamics in Japan. We estimate a Markov‐switching dynamic stochastic general equilibrium model with changes in the monetary–fiscal policy interaction. Focusing on the prolonged deflation observed in Japan, we find that Japan's policy regime was characterized by a combination of passive monetary and fiscal policies. We quantitatively clarify that this plays a substantial role in propagating negative demand shocks. However, after the introduction of unconventional monetary policy, it switched from a passive to an active regime. We show that policy regime changes have helped push up inflation.
Abe et al. (Wed,) studied this question.