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A Regime-Switching SVAR Analysis of Quantitative Easing

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  • Fumio Hayashi

    (Hitotsubashi University)

  • Junko Koeda

    (The University of Tokyo)

Abstract

Central banks of major market economies have recently adopted QE (quantitative easing), allowing excess reserves to build up while maintaining the policy rate at very low levels. We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response analysis yields two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE is not necessarily deflationary.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/F322.pdf
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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-322.

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Length: 47 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:cfi:fseres:cf322

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  1. R. Anton Braun & Yuichiro Waki, 2005. "Monetary Policy during Japan's Lost Decade," CIRJE F-Series CIRJE-F-343, CIRJE, Faculty of Economics, University of Tokyo.
  2. Inoue, Tomoo & Okimoto, Tatsuyoshi, 2008. "Were there structural breaks in the effects of Japanese monetary policy? Re-evaluating policy effects of the lost decade," Journal of the Japanese and International Economies, Elsevier, vol. 22(3), pages 320-342, September.
  3. Yuzo Honda & Yoshihiro Kuroki & Minoru Tachibana, 2007. "An Injection Of Base Money At Zero Interest Rates: Empirical Evidence From The Japanese Experience 2001-2006," Discussion Papers in Economics and Business 07-08, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  4. Jouchi Nakajima & Shigenori Shiratsuka & Yuki Teranishi, 2010. "The Effects of Monetary Policy Commitment: Evidence from Time- varying Parameter VAR Analysis," IMES Discussion Paper Series 10-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
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