The Japanese embarked on a series of fiscal packages and quantitative easing efforts to break low inflation expectations after the start of deflation in the mid-1990s. They were unable either to change inflation dynamics or to raise growth sustainably /Arvind Subramanian, FT, 1 July 2021/.
However, they shied away from initiating a complete tax reform. They failed to increase value-added types of taxes and to lower all sorts of income taxes.
At present, both the US and the EU seem to follow the Japanese way by launching huge fiscal and monetary programs. The main rhetoric is to help economic recovery. Behind the scenes is the funding of the new cold war with China. At the roots is the new economy where digital transition continuously lowers the rate of inflation, resulting in a trap for central banks.
Indeed, as long as inflation is low, real policy rates will remain too high. When real rates are too high, aggregate demand will be weak. So, inflation will remain too low and vice versa.
In Hungary, we managed to get out of this trap by starting a complete overhaul of taxation. It worked well by raising both the rate of inflation and economic growth.
“Taxation, taxation, taxation” - my friends.
Governor Matolcsy, MNB, the Central Bank of Hungary
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