Monetary Policy and Economic Activity in Japan and the United States
AbstractA cornerstone of monetary policy making is that a looser monetary policy is associated with lower interest rates, higher growth of narrow monetary aggregates, higher output and higher inflation. These responses, which we collectively refer to as the liquidity effect hypothesis, are at odds with some of the leading theoretical models of money. This paper proposes and implements a quasi-Bayesian methodology that allows us to compare the liquidity effect hypothesis with two other hypotheses: the sticky price hypothesis and the inflation tax hypothesis. Our results indicate that there is evidence against the liquidity effect hypothesis in U.S. data, but that a skeptical Bayesian decision maker would still assign most posterior weight it. For Japan, in contrast, even a skeptic would end up favoring the sticky price hypothesis.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-251.
Length: 34 pages
Date of creation: Dec 2003
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-07 (All new papers)
- NEP-CBA-2003-12-07 (Central Banking)
- NEP-MON-2003-12-07 (Monetary Economics)
- NEP-SEA-2003-12-07 (South East Asia)
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