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Source of Underestimation of Monetary Policy Effect: Re-examination of the Policy Effectiveness in Japan's 1990s

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  • Masahiko Shibamoto

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper re-examines the empirical evidence on the potency of Japanese monetary policy in the 1990s by comparing the estimated impacts of various proxies of monetary policy shocks on the macro economy. My empirical results demonstrate that the surprise target changes as a proxy of monetary policy shocks had impacts on real output and financial variables over the period 1990–2001. I also show that the estimated effects of identified monetary policy shocks depend on whether the shocks are anticipated or not; The monetary policy effects on the economy are underestimated when the empirical models fail to control for the market expectation for monetary policy stance.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2014-10.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2014-10.

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Length: 21 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:kob:dpaper:dp2014-10

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Keywords: Monetary policy; Surprise target changes; Vector autoregression model; Japan;

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References

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  1. Shioji, Etsuro, 2000. "Identifying Monetary Policy Shocks in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 14(1), pages 22-42, March.
  2. Ogawa, Kazuo, 2000. "Monetary Policy, Credit, and Real Activity: Evidence from the Balance Sheet of Japanese Firms," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 385-407, December.
  3. Jouchi Nakajima & Munehisa Kasuya & Toshiaki Watanabe, 2009. "Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy," IMES Discussion Paper Series 09-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Nakashima, Kiyotaka, 2006. "The Bank of Japan's operating procedures and the identification of monetary policy shocks: A reexamination using the Bernanke-Mihov approach," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 406-433, September.
  5. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  6. Takeshi Kimura & Hiroshi Kobayashi & Jun Muranaga & Hiroshi Ugai, 2003. "The effect of the increase in the monetary base of Japan's economy at zero interest rates: an empirical analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 276-312 Bank for International Settlements.
  7. Ippei Fujiwara, 2004. "Evaluating Monetary Policy When Nominal Interest Rates Are Almost Zero," Econometric Society 2004 Far Eastern Meetings 620, Econometric Society.
  8. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," NBER Working Papers 10402, National Bureau of Economic Research, Inc.
  9. Kasa, Ken & Popper, Helen, 1997. "Monetary Policy in Japan: A Structural VAR Analysis," Journal of the Japanese and International Economies, Elsevier, vol. 11(3), pages 275-295, September.
  10. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
  11. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  12. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  13. Masahiko Shibamoto & Minoru Tachibana, 2013. "The Effect of Unconventional Monetary Policy on the Macro Economy: Evidence from Japan's Quantitative Easing Policy Period," Discussion Paper Series DP2013-12, Research Institute for Economics & Business Administration, Kobe University.
  14. 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).
  15. Masahiko Shibamoto, 2007. "An Analysis Of Monetary Policy Shocks In Japan: A Factor Augmented Vector Autoregressive Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(4), pages 484-503.
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