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Money, interest rates and economic activity: stylized facts for Japan

  • Ramon Moreno
  • Sun Bae Kim

This paper examines how financial market changes affect the usefulness of two alternatve indicators of monetary policy in Japan, a monetary aggregate and an interest rate. The paper tests whether these variables are good predictors of output, and whether responses to shocks to these variables broadly conform to the implications of the monetary transmission model, over two periods between 1960 and 1992. In the earlier period when Japan's financial markets were less developed, a monetary aggregate (M2+CDs) is a relatively useful indicator of monetary policy whereas an interest rate variable is not. In particular, we find some evidence of a "liquidity effect" in response to innovations in money. Neither variable is an entirely satisfactory indicator of monetary policy in the second sample. The results suggest that financial market development may have contributed to reducing the usefulness of money as an indicator of monetary policy.

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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1993)
Issue (Month): ()
Pages: 12-24

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Handle: RePEc:fip:fedfer:y:1993:p:12-24:n:3
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  1. Glenn D. Rudebusch, 1990. "Trends and random walks in macroeconomic time series: a re-examination," Working Paper Series / Economic Activity Section 105, Board of Governors of the Federal Reserve System (U.S.).
  2. Bruce Kasman & Anthony P. Rodriques, 1991. "Financial liberalization and monetary control in Japan," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 28-46.
  3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
  5. Ronald G. Ehrenberg & Randy A. Ehrenberg & Daniel I. Rees & REric L. Ehrenberg, 1991. "School District Leave Policies, Teacher Absenteeism, and Student Achievement," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 72-105.
  6. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier.
  7. Leeper, Eric M. & Gordon, David B., 1992. "In search of the liquidity effect," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 341-369, June.
  8. Michael M. Hutchison, 1992. "Structural change and the macroeconomic effects of oil shocks: empirical evidence from the United States and Japan," Pacific Basin Working Paper Series 92-06, Federal Reserve Bank of San Francisco.
  9. Bryant, R.C., 1991. "Model Representations of Japanese Monetary Policy," Papers 84, Brookings Institution - Working Papers.
  10. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  11. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  12. Yoshio Suzuki & Akio Kuroda & Hiromichi Shirakawa, 1988. "Monetary Control Mechanism in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 6(2), pages 1-27, November.
  13. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  14. Michael Hutchison & John P. Judd, 1991. "Central bank secrecy and money surprises: international evidence," Working Papers in Applied Economic Theory 91-01, Federal Reserve Bank of San Francisco.
  15. Ramon Moreno, 1992. "Are the forces shaping business cycles alike? the evidence from Japan," Pacific Basin Working Paper Series 92-10, Federal Reserve Bank of San Francisco.
  16. Michael Dotsey, 1986. "Japanese monetary policy, a comparative analysis," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 12-24.
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