A Regime-Switching SVAR Analysis of Quantitative Easing
AbstractCentral 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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Bibliographic InfoPaper 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.
Length: 47 pages
Date of creation: Jul 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-CBA-2013-07-15 (Central Banking)
- NEP-MON-2013-07-15 (Monetary Economics)
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