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Monetary Policy and Economic Activity in Japan and the United States

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  • R. Anton Braun

    (Faculty of Economics, University of Tokyo)

  • Etsuro Shioji

    (Yokohama National University)

Abstract

A 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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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-251.

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Length: 34 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:tky:fseres:2003cf251

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  1. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
  3. Shioji, Etsuro, 2000. "Identifying Monetary Policy Shocks in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 14(1), pages 22-42, March.
  4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  5. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  6. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  7. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  8. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
  9. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  10. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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