This is especially true of financial market structures and the monetary policy transmission process which, in Europe, takes place to a greater extent via banks and less so via the capital market. But we can learn two things in particular from the Federal Reserve System’s example. First, how to successfully communicate our exit from expansionary monetary policy.
With carefully chosen and well-designed forward guidance, central banks can influence market participants’ expectations. Second, monetary policy normalisation takes time. Japan is another case entirely. In Japan, the speculative bubble burst in the early 1990s. In the ensuing “lost decade”, the Japanese economy was plagued by a period of mild deflation.