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Has the effect of monetary policy changedduring 1990s?: An Application of Identified Markov Switching Vector Autoregression to the Impulse Response Analysis When the Nominal Interest Rate is Almost Zero

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Author Info

  • Ippei Fujiwara

    ()
    (Research and Statistics Department, Bank of Japan, and Osaka University)

Abstract

I study whether the effect of monetary policy has changed during 1990s and the zero bound of nominal interest rate may have some distortional effect on macroeconomic dynamics. In order to check the existence of structural change without any prior knowledge on break point and to be able to compare the effect of monetary policy before and after the break without any distortion from the difference in degrees of freedom caused by the different estimated periods, the identi ed Markov switching vector autoregression model is estimated. The result shows that there is a structural change in 1990s and the effect of monetary policy has become weaker since then. As obvious, traditional interest rate channel is not functioning and therefore the role of monetary expansion is limited now. Another intriguing by-product is that the conventional puzzles with identi ed VAR, namely price puzzle and liquidity puzzle, are often re- solved in one regime, but not in the whole sample. This nding may have some implication for the cause of those puzzles, the coexistence of equi- librium dynamics and disequilibrium dynamics in economic time series.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0308.pdf
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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 03-08.

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Length: 48 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:osk:wpaper:03-08

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Web page: http://www.econ.osaka-u.ac.jp/
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Related research

Keywords: Markov Switching Model; VAR; Monetary Policy; Price Puzzle; Liquidity Puzzle; Bootstrapping; Zero Bound of Nominal Interest Rate;

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References

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  1. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  2. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
  3. Ehrmann , Michael & Ellison, Martin & Valla, Natacha, 2001. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Research Discussion Papers 11/2001, Bank of Finland.
  4. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  5. Ramana Ramaswamy & Christel Rendu, 2000. "Japan's Stagnant Nineties: A Vector Autoregression Retrospective," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 5.
  6. 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.
  7. Miyao, Ryuzo, 2000. "The Role of Monetary Policy in Japan: A Break in the 1990s?," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 366-384, December.
  8. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
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Citations

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Cited by:
  1. Ippei Fujiwara, 2003. "Output Composition of Monetary Policy Transmission Mechanism in Japan," Discussion Papers in Economics and Business 03-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  2. Ippei Fujiwara, 2003. "Is There a Direct Effect of Money?: Money's Role in an Estimated Monetary Business Cycle Model of the Japanese Economy," Discussion Papers in Economics and Business 03-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Nobuo Inaba & Takashi Kozu & Toshitaka Sekine & Takashi Nagahata, 2005. "Non-performing loans and the real economy: Japan’s experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 106-27 Bank for International Settlements.

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