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Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach

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  • Nakajima Jouchi

    ()
    (Duke University and Bank of Japan)

Abstract

This paper attempts to explore monetary policy transmission under zero interest rates by explicitly incorporating the zero lower bound (ZLB) of nominal interest rates into the time-varying parameter structural vector autoregression model with stochastic volatility (TVP-VAR-ZLB). Nominal interest rates are modeled as censored variables with Tobit-type non-linearity and are incorporated into the TVP-VAR framework. For estimation, an efficient Markov chain Monte Carlo (MCMC) method is constructed in the context of Bayesian inference. The model is applied to Japanese macroeconomic data, including the periods of the zero interest rates policy and the quantitative easing policy. The empirical results show that a dynamic relationship between monetary policy and macroeconomic variables operates through changes in medium-term interest rates rather than policy interest rates under the ZLB. However, the explicit consideration of the ZLB does not otherwise affect macroeconomic dynamics.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 11 (2011)
Issue (Month): 1 (October)
Pages: 1-24

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Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:32

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Cited by:
  1. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Jouchi Nakajima & Munehisa Kasuya & Toshiaki Watanabe, 2009. "Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy," Global COE Hi-Stat Discussion Paper Series gd09-072, Institute of Economic Research, Hitotsubashi University.
  3. Michal Franta, 2011. "Identification of Monetary Policy Shocks in Japan Using Sign Restrictions within the TVP-VAR Framework," IMES Discussion Paper Series 11-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Michaelis, Henrike & Watzka, Sebastian, 2014. "Are there Differences in the Effectiveness of Quantitative Easing in Japan over Time?," Discussion Papers in Economics 21087, University of Munich, Department of Economics.

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