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Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach

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  • Nakajima Jouchi

    (Duke University and Bank of Japan)

Abstract

This paper attempts to explore monetary policy transmission under zero interest rates by explicitly incorporating the zero lower bound (ZLB) of nominal interest rates into the time-varying parameter structural vector autoregression model with stochastic volatility (TVP-VAR-ZLB). Nominal interest rates are modeled as censored variables with Tobit-type non-linearity and are incorporated into the TVP-VAR framework. For estimation, an efficient Markov chain Monte Carlo (MCMC) method is constructed in the context of Bayesian inference. The model is applied to Japanese macroeconomic data, including the periods of the zero interest rates policy and the quantitative easing policy. The empirical results show that a dynamic relationship between monetary policy and macroeconomic variables operates through changes in medium-term interest rates rather than policy interest rates under the ZLB. However, the explicit consideration of the ZLB does not otherwise affect macroeconomic dynamics.

Suggested Citation

  • Nakajima Jouchi, 2011. "Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-24, October.
    • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:32
    DOI: 10.2202/1935-1690.2323
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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