The estimation of monetary policy reaction function in a data-rich environment: The case of Japan (original) (raw)
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Journal of the Japanese and International Economies, 2006
This paper reexamines the operating procedures of the Bank of Japan (BOJ) and identifies the monetary policy shock up to June 1995 by employing the structural VAR approach of Bernanke and Mihov (1998). This approach identifies exogenous components of monetary policy by setting up equilibrium models of the reserve market. In this way, it presents two equilibrium models, the Implicit Cost (IC) model and the Credit Rationing (CR) model, which are distinguished by opposing views about the BOJ's discount-window borrowing policy. The IC model has the feature that the BOJ endogenously accommodates the demand for discount-window borrowing by private banks. In contrast , the CR model has the feature that the BOJ exogenously controls the level of discount-window lending. This paper demonstrates that the CR model is superior to the IC model in describing the BOJ's operating procedures up to June 1995.
Japan’s monetary policy: a literature review and empirical assessment
Journal of Computational Social Science, 2021
This study reviews and assesses the monetary policy implemented by the Bank of Japan (BOJ), focusing on policies that employ short-term interest rates as the operational target. Our review of empirical studies on monetary policy that influenced the BOJ's policy reveals that they focused on (1) banking system and interest rate mechanisms, (2) financial deregulation and monetary aggregates, (3) the systematic reaction regarding the achievement of the ultimate goal, and (4) confirming how certain evidence serves as material for policy judgments and communication with the public. Our empirical results on the causal effect of monetary policy in the framework of a structural vector autoregressive model attest to the significant impact of Japan's monetary policy on the financial market and macroeconomy from the 1980s onward. Our counterfactual simulations affirm that the central bank should consistently shift its policy stance to achieve macroeconomic stability. Even small policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery. Keywords Japanese macroeconomy • Short-term interest rate • Causal effect of monetary policy • Counterfactual simulation • Vector autoregressive model We are grateful to Masato Shizume and two anonymous referees for helpful comments and discussions. We would also like to thank Miho Kohsaka and Mayura Takami for providing excellent research assistance. This study received financial support from the Japan Society for the Promotion of Science (JSPS KAKENHI, Grant Numbers 15H05729, 17K03804, and 20H05633).
The Japanese Economic Review, 2008
This paper discusses the successes and failures of Japanese monetary policy by evaluating policies from January 1980 to May 2003 in the light of optimal policy rules. First, we quantitatively conceptualize the Bank of Japan (BOJ)'s policy decisions by employing Bernanke and Mihov's (1998) econometric methodology for developing monetarypolicy measures, and term the resulting policy measure the 'actual policy measure'. Next, assuming that the BOJ is committed to optimal policy rules, we simulate optimal policy paths, which we term 'optimal policy measures'. We evaluate Japanese monetary policy historically by comparing actual and optimal policy measures.
International Journal of Finance & Economics
Japan's episodes of lower bound of interest rates together with macroeconomic uncertainty for over the past two decades stands as a tremendous hurdle for the estimation of Taylor-type rule models. We demarcate our study from previous literature by conducting the estimations not only at various points on the conditional distribution of the interest rate but also at various quantiles of an additional regressor on top of inflation and output, viz., an uncertainty measure, by adopting a quantile nonseparable triangular system estimation. The results show that the reaction to uncertainty seems to have substituted the Bank's reaction to inflation and output, lending support to the Brainard attenuation principle. In essence, faced with higher uncertainty, the monetary authority reacts by cutting (attenuating) its policy rate across all quantiles of uncertainty at all conditional quantiles of interest rate, with an increased response of the Bank of Japan to uncertainty at its lower quantiles when interest rate is at its lower conditional quantiles. A possible explanation is the greater concern of getting out from the lower bounds of interest rate.
SSRN Electronic Journal, 1998
This paper seeks, through the estimation of central bank reaction functions for 19 OECD countries in a panel setting, to examine the relationship between certain key target variables and an instrument of monetary policy, namely short-term interest rates. A rolling, reduced form, vector autoregression (VAR) of interest rates, unemployment, and inflation is employed to mimic a central bank's information set. Each "roll" updates this information set by one observation while eliminating the first. The one-step ahead forecast error is then modeled in the reaction function to test the extent to which the policy instrument reacts to unemployment and inflation innovations. We also consider the role of professional forecasts in central bank reactions. In addition to forecast errors, we also examine the reaction of interest rates as a function of how unemployment diverges from a newly proposed estimate of trend unemployment. Alternatively, we also apply the Hodrick-Prescott filter and consider other assumptions about the trend unemployment rate. We examine the possibility that central banks react asymmetrically to positive and negative shocks. Furthermore, where relevant, we include deviations from published inflation target "bands" to capture the recent commitment by some central banks to formally target inflation. Finally, we also examine the influence of political variables, such as election timing and partisan changes in government, on our chosen instrument of monetary policy. In addition, several definitions of central bank autonomy and exchange rate regimes are included as control variables to capture institutional effects on monetary policy formation. The results of this study suggest that central banks react in a predictable manner to unemployment and inflation innovations. Furthermore, deviations from trend unemployment appear to generate compensating movements in interest rates. Evidence confirming the possibility of threshold effects, however, is less conclusive. Moreover, there is little evidence of political influence on monetary policy, regardless of the time period examined. Indexes of central bank independence account for little of the cross sectional variation in interest rates among OECD countries. However, when the group of inflation targeting countries are separately considered, the reaction functions are much more informative about both central bank and government motives.
An Analysis of Monetary Policy Shocks in Japan: A Factor Augmented Vector Autoregressive Approach
The Japanese Economic Review, 2007
This paper analyses monetary policy shocks in Japan using a factor augmented vector autoregressive approach. There are three main findings. First, the time lags with which the monetary policy shocks are transmitted vary between the various macroeconomic time series. These include several series that have not been included thus far in standard vector autoregressive analysis, including housing starts and employment indices. Second, a coherent picture of monetary policy effects on the economy is obtained. Third, it is found that monetary policy shocks have a stronger impact on real variables, such as employment and housing starts, than industrial production.
Monetary factors and inflation in Japan
Journal of the Japanese and International Economies, 2008
Recently, the Bank of Japan outlined a "two perspectives" approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands.