Monetary Policy and the Term Structure of Interest Rates When Short-Term Rates Are Close to Zero
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.
Volume (Year): 28 (2010)
Issue (Month): (November)
|Contact details of provider:|| Postal: |
Web page: http://www.imes.boj.or.jp/
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.:
- 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.
- James Clouse & Dale Henderson & Athanasios Orphanides & David Small & Peter Tinsley, 2000. "Monetary policy when the nominal short-term interest rate is zero," Finance and Economics Discussion Series 2000-51, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- GlennD. Rudebusch & Tao Wu, 2008. "A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, 07.
- Glenn Rudebusch & Tao Wu, 2004. "A macro-finance model of the term structure, monetary policy, and the economy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Tao Wu & Glenn Rudebusch, 2004. "A Macro-Finance Model of the Term Structure, Monetary Policy, and the Economy," 2004 Meeting Papers 104, Society for Economic Dynamics.
- 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.
- Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 131-202 National Bureau of Economic Research, Inc.
- 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.
- 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.
- Buiter, Willem H. & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
- Willem H Buiter & Nikolaos Panigirtzoglou, 2000. "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England.
- 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.
- Jun Nagayasu, 2003. "The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period," IMF Working Papers 03/208, International Monetary Fund.
- 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.
- 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.
- Sharon Kozicki & P.A.Tinsley, 2001. "What do you expect? : imperfect policy credibility and tests of the expectations hypothesis?," Research Working Paper RWP 01-02, Federal Reserve Bank of Kansas City.
- 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.).
- David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
- 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.
- R. Anton Braun & Etsuro Shioji, 2003.
"Monetary Policy and the Term Structure of Interest Rates in Japan,"
CIRJE-F-252, CIRJE, Faculty of Economics, University of Tokyo.
- Braun, R. Anton & Shioji, Etsuro, 2006. "Monetary Policy and the Term Structure of Interest Rates in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 141-162, February.
- 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.
- Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
- Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap; Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund.
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.