Invoking the venerable quantity theory of money, Hetzel (2004) argues that central banks are not powerless to end deflation, even when short-term interest rates are zero. While agreeing with his overall conclusion that central banks do possess tools to fight deflation, this commentary points out that the sixfold expansion in current account balances over the past three years has thus far failed to have any discernable impact on the volume of M2+CDs in Japan. This observation highlights an important obstacle to the direct implementation of the quantity theory's policy prescription when the zero lower bound on the short-term nominal interest rate is binding. Hetzel's proposal to link Japan' s current account balance target is nonetheless a useful one, however, as it would represent a step toward a price level target.
Keywords: Quantity theory; Quantitative easing; Deflation
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.