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Policy Commitment and Market Expectations: Lessons Learned from Survey Based Evidence under Japan's Quantitative Easing Policy

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  • Yoshiyuki Nakazono

    (Waseda University and Research Fellow of the Japan Society for the Promotion of Science (E-mail: ynakazono fuji.waseda.jp))

  • Kozo Ueda

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp))

Abstract

The Bank of Japan conducted its quantitative easing policy ( QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the zero percent threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-12.

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Date of creation: Jun 2011
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Handle: RePEc:ime:imedps:11-e-12

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Keywords: Commitment policy; policy duration effect; unconventional monetary policy; zero lower bound;

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  1. Puneet Chehal & Bharat Trehan, 2009. "Talking about tomorrow’s monetary policy today," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov9.
  2. Nakazono, Yoshiyuki & Ueda, Kozo, 2013. "Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy," Japan and the World Economy, Elsevier, vol. 25, pages 102-113.
  3. Hiroshi Ugai, 2007. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(1), pages 1-48, March.
  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. Nobuyuki Oda & Kazuo Ueda, 2005. "The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach," CIRJE F-Series CIRJE-F-336, CIRJE, Faculty of Economics, University of Tokyo.
  6. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  7. Lancaster, Tony, 2000. "The incidental parameter problem since 1948," Journal of Econometrics, Elsevier, vol. 95(2), pages 391-413, April.
  8. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  9. Baba, Naohiko & Nishioka, Shinichi & Oda, Nobuyuki & Shirakawa, Masaaki & Ueda, Kazuo & Ugai, Hiroshi, 2005. "Japan's Deflation, Problems in the Financial System, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(1), pages 47-111, February.
  10. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
  11. Zhongfang He, 2010. "Evaluating the Effect of the Bank of Canada's Conditional Commitment Policy," Discussion Papers 10-11, Bank of Canada.
  12. Kozo Ueda, 2010. "A Time-Invariant Duration Policy under the Zero Lower Bound," IMES Discussion Paper Series 10-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
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Cited by:
  1. Nakazono, Yoshiyuki & Ueda, Kozo, 2013. "Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy," Japan and the World Economy, Elsevier, vol. 25, pages 102-113.
  2. FUJIWARA Ippei & NAKAZONO Yoshiyuki & UEDA Kozo, 2014. "Policy Regime Change against Chronic Deflation? Policy option under a long-term liquidity trap," Discussion papers 14019, Research Institute of Economy, Trade and Industry (RIETI).
  3. Junko Koeda, 2011. "Japanese Yield Curves In and Out of a Zero Rate Environmnet: A Macro-Finance Perspective," CARF F-Series CARF-F-254, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Nov 2011.
  4. Kozo Ueda & Yoshiyuki Nakazono & Ippei Fujiwara, 2014. "Policy Regime Change against Chronic Deflation? Policy option under long-term liquidity trap," AJRC Working Papers 1402, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.

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