Please explain how do Keynesian and Real Business Cycle economists differ on the right response to Japanese stagnation? On what sorts of issues might they be able to agree?
The real economic growth for three decades prior to the 1990s was substantial. The 1960s marked 10% average growth, the 1970s with 5% average growth and the 1980s with 4% average growth. (Wikipedia) Over the last ten years, Japanese public debt and unemployment levels have doubled, and average economic growth has fallen by nearly three-quarters--to about 0.9 percent per year, the lowest of any industrialized economy. Bad debts in the Japanese banking system total an unprecedented $1 trillion and are still rising.
Though now there are signs of recovery.
Keynesian response to Japanese stagnation
According to the Keynes the major reason of the stagnation is due to demand shocks causing economic fluctuation. According to the theory it takes time for prices (including wages) to adjust in response to a change in demand and that prices are typically sticky on the downside (downward rigidity). Therefore, once the economy falls into a shortage-of-demand phase, the shortage stays as it is for a long time and the economy remains in the doldrums due to weak adjustment of prices. If the government expands its spending and creates demand, then, according to the theory, the economy can get out of the doldrums.
Thus there has been problem of over-capacity. Having prepared a large safety net and started processes for ...
Keynesian and Real Business Cycle economists are contrasted.