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The effectiveness of monetary policy: Evidence from market operation-based monetary policy indices

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  • Heckel, Markus
  • Inoue, Tomoo
  • Nishimura, Kiyohiko G.
  • Okimoto, Tatsuyoshi

Abstract

Open market operations (MOs) became an integral part of the unconventional monetary policy (UMP) when the policy rates hit the effective lower bound in major advanced countries since the 2008 global financial crisis. This study quantifies the impact of UMP carried out by MOs on the macroeconomy in Japan from 2003 to 2019, based on four MO-based monetary policy indices (MO-MPIs). One index is characterized by a broadly defined quantitative easing index while the other three are liquidity supply indices targeting different financial market segments. Using Markov-switching vector autoregressions, we identify three distinctive regimes with different policy impacts: (1) before mid-2008, (2) from mid-2008 to mid-2016, and (3) after mid-2016. Contrary to conventional wisdom, the drastic policy change of April, 2013 (introduction of quantitative and qualitative easing) was not a regime changer. We find that UMP carried out by MOs was the most effective in the second regime, with very strong impacts of all MO-MPIs on macroeconomic variables such as GDP, CPI, government bond prices, and stock prices. Furthermore, MO-MPIs became substantially less effective in the third regime, after the Bank of Japan introduced yield-curve control.

Suggested Citation

  • Heckel, Markus & Inoue, Tomoo & Nishimura, Kiyohiko G. & Okimoto, Tatsuyoshi, 2026. "The effectiveness of monetary policy: Evidence from market operation-based monetary policy indices," Journal of International Money and Finance, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jimfin:v:162:y:2026:i:c:s0261560625002463
    DOI: 10.1016/j.jimonfin.2025.103511
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    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
    • 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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