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Measuring Monetary Policy Under Zero Interest Rates With a Dynamic Stochastic General Equilibrium Model: An Application of a Particle Filter

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  • Tomiyuki Kitamura

    (Bank of Japan)

Abstract

This paper proposes an empirical dynamic stochastic general equilibrium (DSGE) framework to measure the degree of monetary policy accommodation when the nominal interest rate is zero. The framework employs a hypothetical DSGE model in which the nominal interest rate can be lowered below zero because, for instance, the central bank can impose a 'carry tax' on currency. We call the model's nominal interest rate the 'shadow rate.' When the shadow rate is positive, it is observed as the actual nominal interest rate set by the central bank. When it is negative, however, it deviates from the actual nominal interest rate which remains at its lower-bound of zero. In the model, it is not the actual nominal interest rate but the shadow rate that affects the economy when the two rates deviate. The hypothetical DSGE model can be fit to data using a version of particle filters, and the historical movements of the shadow rate can be estimated. As an application, we estimate a small New Keynesian model using Japanese data. The results suggest that the shadow rate was well below zero during the period when the nominal interest rate was zero in the early 2000s.

Suggested Citation

  • Tomiyuki Kitamura, 2010. "Measuring Monetary Policy Under Zero Interest Rates With a Dynamic Stochastic General Equilibrium Model: An Application of a Particle Filter," Bank of Japan Working Paper Series 10-E-10, Bank of Japan.
  • Handle: RePEc:boj:bojwps:10-e-10
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    References listed on IDEAS

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    1. Hibiki Ichiue & Takushi Kurozumi & Takeki Sunakawa, 2013. "Inflation Dynamics And Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach For Japan'S Economy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 273-287, January.
    2. Kato, Ryo & Nishiyama, Shin-Ichi, 2005. "Optimal monetary policy when interest rates are bounded at zero," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 97-133, January.
    3. Black, Fischer, 1995. "Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-1376, December.
    4. Naoko Hara & Naohisa Hirakata & Yusuke Inomata & Satoshi Ito & Takuji Kawamoto & Takushi Kurozumi & Makoto Minegishi & Izumi Takagawa, 2006. "The New Estimates of Output Gap and Potential Growth Rate," Bank of Japan Review Series 06-E-3, Bank of Japan.
    5. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-835, October.
    6. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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    Cited by:

    1. Hibiki Ichiue & Yoichi Ueno, 2018. "A Survey-based Shadow Rate and Unconventional Monetary Policy Effects," IMES Discussion Paper Series 18-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Go Kotera & Saisuke Sakai, 2017. "Complementarity between Merit Goods and Private Consumption: Evidence from estimated DSGE model for Japan," KIER Working Papers 978, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    Monetary policy; Dynamic stochastic general equilibrium; Zero lower-bound of nominal interest rate; Particle filter; Shadow rate;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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