A) Assume that you are a member of the Bank of Japan (BoJ) board of governors in 1998. The president of BoJ announces that he is thinking of applying Quantitative Easing (QE).
1) In your view, what could be the reasons behind this decision? (20 marks)
2) What are the potential advantages and disadvantages of QE? Discuss critically. (20 marks)
B. Assume that the Minister of Finance is responsible for fiscal policy and the Central Banker is responsible for monetary policy. Each policy maker has two choices; either to follow a contractionary (tight) or an expansionary (easy) policy. In 2005, the choices were as described in Table A (with the numbers within the matrix showing the payoffs to each policy maker):
Table A-2005 Minister of Finance
Central Banker
Tight Easy Tight 3, 1 0, 2 Easy 1,1 2, 3
In 2010, the choices were as described in Table B:
Table B-2010 Minister of Finance
Central Banker
Tight Easy Tight 3, 3 0, 0 Easy 1,1 2, 0
1) What is/are the Nash equilibria in each year? Explain your answers. (40 marks)
2) Assume that you are a Government Advisor and you are asked to give a policy report. What will you write in such a report regarding the tools for the chosen policy combination in each year? Discuss the advantages and disadvantages of the policy tools in each case. (20 marks)
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