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Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective

Author

Listed:
  • Parantap Basu

    (Professor, Durham University Business School, Durham University (E-mail: parantap.basu@durham.ac.uk.))

  • Kenji Wada

    (Professor, Faculty of Business and Commerce, Keio University (E-mail: kwada@fbc.keio.ac.jp))

Abstract

In this paper, we set up a medium scale new-Keynesian dynamic stochastic general equilibrium (DSGE) model to analyze the effects of various phases of unconventional monetary policy (UMP) on the Japanese bond market. Our model has two novel features: (i) a banking friction in the form of an aggregate bank run risk to motivate commercial banks' demand for excess reserve, and (ii) dynamic linkage between Central Bank resource constraint and the government budget constraint via a transfer payment by the Central Bank to the Treasury. We do three policy simulations to analyze the effects of various phases of UMP shocks on the bond market, namely: (i) effect of a quantitative easing (QE) shock; (ii) the effect of a negative shock to the overnight borrowing rate; and (iii) the effect of a negative shock to the interest rate on banks' excess reserve (IOER). In light of these results, we do an evaluation of the recent yield curve control policy of the Bank of Japan.

Suggested Citation

  • Parantap Basu & Kenji Wada, 2018. "Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective," IMES Discussion Paper Series 18-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:18-e-12
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    QE; QQE; Excess Reserve; Overnight Borrowing Rate; IOER; Yield Curve Control;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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