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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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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48687.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48687

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Cited by:
  1. Leonardo Gambacorta & Boris Hofmann & Gert Peersman, 2014. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 615-642, 06.
  2. 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.
  3. Michaelis, Henrike & Watzka, Sebastian, 2014. "Are there Differences in the Effectiveness of Quantitative Easing in Japan over Time?," Discussion Papers in Economics 21087, University of Munich, Department of Economics.
  4. Stefan Behrendt, 2013. "Monetary Transmission via the Central Bank Balance Sheet," Global Financial Markets Working Paper Series 49-2013, Friedrich-Schiller-University Jena.
  5. Henrike Michaelis & Sebastian Watzka, 2014. "Are there Differences in the Effectiveness of Quantitative Easing at the Zero-Lower-Bound in Japan over Time?," CESifo Working Paper Series 4901, CESifo Group Munich.
  6. Gert Peersman, 2012. "Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound," 2012 Meeting Papers 400, Society for Economic Dynamics.

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