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Monetary reforms and inflation expectations in Japan: Evidence from inflation-indexed bonds

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  • Christensen, Jens H.E.
  • Spiegel, Mark M.

Abstract

We assess the impact of news concerning recent Japanese monetary reforms on long-term inflation expectations using an arbitrage-free term structure model of nominal and real yields. Our model accounts for the value of deflation protection embedded in Japanese inflation-indexed bonds issued since 2013, which is sizable and time-varying. Our results suggest that Japanese long-term inflation expectations have remained positive despite extensive spells of deflation, leaving inflation risk premia mostly negative during this period. Moreover, adjusting for deflation protection demonstrates that market responses to policy changes were not as inflationary as they appear under standard modeling procedures. Consequently, the reforms were less “disappointing” than is widely perceived.

Suggested Citation

  • Christensen, Jens H.E. & Spiegel, Mark M., 2022. "Monetary reforms and inflation expectations in Japan: Evidence from inflation-indexed bonds," Journal of Econometrics, Elsevier, vol. 231(2), pages 410-431.
  • Handle: RePEc:eee:econom:v:231:y:2022:i:2:p:410-431
    DOI: 10.1016/j.jeconom.2021.10.007
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    More about this item

    Keywords

    Affine arbitrage-free term structure model; Unconventional monetary policy; Deflation risk; Deflation protection; Negative interest rate;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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