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Real effects of Quantitative Easing at the Zero-Lower Bound: Structural VAR-based evidence from Japan

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  • Watzka, Sebastian
  • Schenkelberg, Heike

Abstract

Using monthly post-1995 Japanese data we propose a new sign-restriction based approach to identify monetary policy shocks when the economy is at the zero-lower bound (ZLB). The identifying restrictions are thoroughly grounded in liquidity trap theory. Our results show that a quantitative easing shock leads to a significant but temporary rise in industrial production. The effect on the price level is significantly positive and permanent. Inflation does therefore temporarily rise but returns to zero subsequently. In addition, we show the shock has even stronger effects on these variables if stock prices react positively. Our results are robust to different specifications, in particular to the further identification of aggregate demand and supply shocks under liquidity trap conditions. Accordingly, our results imply that while the Japanese Quantitative Easing experiment was successful in stimulating economic activity and inflation in the shortrun, it did not lead to any permanent increase in the inflation rate. We believe these results are interesting not only for the Japanese economy, but also for other advanced economies where monetary policy is currently constrained by the ZLB.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19697.

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Date of creation: 2011
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Publication status: Published in Beiträge zur Jahrestagung des Vereins für Socialpolitik 2011: Die Ordnung der Weltwirtschaft: Lektionen aus der Krise - Session: Governments, Banks and Central Banks in the Financial Crisis D1-V2 (2011)
Handle: RePEc:lmu:muenar:19697

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Cited by:
  1. Alexander Guarín & José Fernando Moreno & Hernando Vargas, 2014. "An Empirical Analysis of the Relationship between US and Colombian Long-Term Sovereign Bond Yields," Borradores de Economia 822, Banco de la Republica de Colombia.
  2. Gert Peersman, 2012. "Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound," 2012 Meeting Papers 400, Society for Economic Dynamics.
  3. L. Gambacorta & B. Hofmann & G. Peersman, 2011. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/765, Ghent University, Faculty of Economics and Business Administration.
  4. Alexander Guarín & José Fernando Moreno & Hernando Vargas, 2014. "An Empirical Analysis of the Relationship between US and Colombian Long-Term Sovereign Bond Yields?," BORRADORES DE ECONOMIA 011311, BANCO DE LA REPÚBLICA.
  5. Stefan Behrendt, 2013. "Monetary Transmission via the Central Bank Balance Sheet," Global Financial Markets Working Paper Series 49-2013, Friedrich-Schiller-University Jena.

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