Earlier, I pointed out the two causes of the global economic slump: the acute symptoms sparked directly by the financial crisis and chronic illness due to balance sheet adjustments. The policy responses of Japan and other countries were taken to address these two causes.
When the economy is hit by a large and persistent adverse shock, should we accept greater downside risks to inflation to avoid exacerbating financial imbalances? Or indeed, given such imbalances, should we tighten policy less aggressively as the economy returns to potential to avoid triggering financial system risks?