IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Monetary Policy and the Term Structure of Interest Rates When Short-Term Rates Are Close to Zero

  • Shigeru Iwata

    (Department of Economics, University of Kansas (E-mail: iwata@ku.edu))

Registered author(s):

    The zero lower bound on nominal interest rates can affect the effectiveness of monetary policy potentially in two ways. First, it limits the size of a change in the policy interest rate when trying to loosen money. For example, when the nominal rate is 0.5 percent, it obviously cannot be cut by more than 0.5 percent. Second, it may alter the mechanism of how a movement of the policy rate drives market rates of longer maturities. This paper is an attempt to investigate the latter issue, and, in particular, to empirically examine the effect of monetary policy on the term structure of interest rates when nominal short-term rates are close to zero, using Japanese data in the 1990s and early 2000s. We found that when the policy short rate is already zero but longer rates are still positive in the zero interest rate period, an expansionary monetary policy still works through the conventional interest rate channel by pushing down longer rates, although the effect is much weakened relative to the normal time. When the longer rates are already lowered to some level, however (for example, the 10-year bond rate went down to the level as low as 1.5 percent during the quantitative easing period of 2001-06), a further expansion of the monetary base by increasing excess reserves of banks appears to have little effect in lowering longer-term rates.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.imes.boj.or.jp/research/papers/english/me28-5.pdf
    Download Restriction: no

    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 28 (2010)
    Issue (Month): (November)
    Pages: 59-78

    as
    in new window

    Handle: RePEc:ime:imemes:v:28:y:2010:p:59-78
    Contact details of provider: Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103
    Phone: +81-3-3279-111
    Fax: +81-3-3510-1265
    Web page: http://www.imes.boj.or.jp/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
    2. Glenn D. Rudebusch & Tao Wu, 2003. "A macro-finance model of the term structure, monetary policy, and the economy," Working Paper Series 2003-17, Federal Reserve Bank of San Francisco.
    3. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc.
    4. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    5. Willem H. Buiter & Nikolaos Panigirtzoglou, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Papers 7245, National Bureau of Economic Research, Inc.
    6. Nagayasu, Jun, 2004. "The Term Structure of Interest Rates and Monetary Policy during a Zero Interest Rate Period," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 19-43, May.
    7. Fujiki, Hiroshi & Shiratsuka, Shigenori, 2002. "Policy Duration Effect under the Zero Interest Rate Policy in 1999-2000: Evidence from Japan's Money Market Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(1), pages 1-31, January.
    8. Kozicki, Sharon & Tinsley, P.A., 2005. "What do you expect? Imperfect policy credibility and tests of the expectations hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 421-447, March.
    9. David Reifschneider & John C. Williams, 1999. "Three lessons for monetary policy in a low inflation era," Finance and Economics Discussion Series 1999-44, Board of Governors of the Federal Reserve System (U.S.).
    10. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    11. R. Anton Braun & Etsuro Shioji, 2003. "Monetary Policy and the Term Structure of Interest Rates in Japan," CIRJE F-Series CIRJE-F-252, CIRJE, Faculty of Economics, University of Tokyo.
    12. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    13. Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap; Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:28:y:2010:p:59-78. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.