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Testing the effectiveness of unconventional monetary policy in Japan and the United States

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  • Daisuke Ikeda
  • Shangshang Li
  • Sophocles Mavroeidis
  • Francesco Zanetti

Abstract

Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop a theoretical model that underpins our empirical test of this `irrelevance hypothesis' based on the simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of monetary policy. We test the hypothesis for Japan and the United States using a structural vector autoregressive model with the ELB. We firmly reject the hypothesis but find that UMP has had strong delayed effects.

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  • Daisuke Ikeda & Shangshang Li & Sophocles Mavroeidis & Francesco Zanetti, 2020. "Testing the effectiveness of unconventional monetary policy in Japan and the United States," Papers 2012.15158, arXiv.org, revised Nov 2023.
    • Handle: RePEc:arx:papers:2012.15158
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    Cited by:

    1. Hamano, Masashige & Zanetti, Francesco, 2022. "Monetary policy, firm heterogeneity, and product variety," European Economic Review, Elsevier, vol. 144(C).
    2. Sophocles Mavroeidis, 2021. "Identification at the Zero Lower Bound," Econometrica, Econometric Society, vol. 89(6), pages 2855-2885, November.
    3. Casares, Miguel & Khan, Hashmat & Poutineau, Jean-Christophe, 2020. "The extensive margin and US aggregate fluctuations: A quantitative assessment," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    4. R. Anton Braun & Daisuke Ikeda, 2022. "Why Aging Induces Deflation and Secular Stagnation," FRB Atlanta Working Paper 2022-12, Federal Reserve Bank of Atlanta.
    5. Qazi Haque & Leandro M. Magnusson & Kazuki Tomioka, 2021. "Empirical Evidence on the Dynamics of Investment Under Uncertainty in the U.S," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1193-1217, October.
    6. Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    7. Ascari, Guido & Mavroeidis, Sophocles, 2022. "The unbearable lightness of equilibria in a low interest rate environment," Journal of Monetary Economics, Elsevier, vol. 127(C), pages 1-17.
    8. Ichiro Muto & Nao Sudo & Shunichi Yoneyama, 2023. "Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 159-207, February.
    9. Aruoba, S. Borağan & Mlikota, Marko & Schorfheide, Frank & Villalvazo, Sergio, 2022. "SVARs with occasionally-binding constraints," Journal of Econometrics, Elsevier, vol. 231(2), pages 477-499.
    10. Clara De Luigi & Martin Feldkircher & Philipp Poyntner & Helene Schuberth, 2023. "Quantitative Easing and Wealth Inequality: The Asset Price Channel," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(3), pages 638-670, June.
    11. Abhishek Kumar & Sushanta Mallick & Madhusudan Mohanty & Fabrizio Zampolli, 2023. "Market Volatility, Monetary Policy and the Term Premium," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 208-237, February.
    12. R. Anton Braun & Daisuke Ikeda, 2021. "Monetary Policy over the Lifecycle," IMES Discussion Paper Series 21-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    13. Gabriel Arce‐Alfaro & Boris Blagov, 2023. "Monetary Policy Uncertainty and Inflation Expectations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 70-94, February.
    14. Hiroyuki Kubota & Mototsugu Shintani, 2023. "Macroeconomic Effects of Monetary Policy in Japan: An Analysis Using Interest Rate Futures Surprises," CARF F-Series CARF-F-555, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Hiroyuki Kubota & Mototsugu Shintani, 2020. "High-frequency Identification of Unconventional Monetary Policy Shocks in Japan," CARF F-Series CARF-F-502, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    16. James A. Duffy & Sophocles Mavroeidis & Sam Wycherley, 2022. "Cointegration with Occasionally Binding Constraints," Papers 2211.09604, arXiv.org, revised Jul 2023.
    17. Swaminathan, Anthony, 2021. "Macroeconomic volatility at the zero lower bound: Evidence from the OECD," Economics Letters, Elsevier, vol. 204(C).

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    • 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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