Estimating the Bank of Japan's monetary policy reaction function
Extending the Taylor rule and applying the VAR model, the author finds that the overnight call rate reacts positively to a shock to the inflation gap, the output gap, yen depreciation, stock prices, or the lagged overnight call rate. The response of the overnight call rate to exchange rates or stock prices lasts longer than the reaction to the output gap and the inflation gap. Except for the lagged overnight call rate, the inflation gap and the exchange rate are more influential than the output gap and stock prices in explaining the variance of the overnight call rate.
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