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Effects and Side Effects of Unconventional Monetary Policy: A Shadow Rate Approach

Author

Listed:
  • Atsuki Hirata

    (Bank of Japan)

  • Sohei Kaihatsu

    (Bank of Japan)

  • Yoshiyasu Kasai

    (Bank of Japan)

  • Hiroki Yamamoto

    (Bank of Japan)

  • Jouchi Nakajima

    (Hitotsubashi University)

Abstract

Over the past 25 years, the Bank of Japan has conducted a variety of unconventional monetary policies. This paper empirically analyzes the impact of these unconventional monetary policies on Japan's economic activity, prices, and financial sector. First, we investigate the impact of the Bank of Japan's purchase of long-term JGBs on long-term interest rates and find that it lowered the rates by lowering the term premium. Its impact was particularly pronounced following the introduction of Quantitative and Qualitative Monetary Easing (QQE) in 2013. Second, we employ a factor-augmented vector autoregression (FAVAR) and the shadow rates as a proxy of a monetary policy stance reflecting information on the entire government bond yield, and investigate the counterfactual analyses. Our estimation result indicates that the series of unconventional monetary policies had a positive effect on output and prices, and the large-scale monetary easing after the introduction of QQE contributed to fostering a non-deflationary environment in Japan. The empirical analysis also indicates that the unconventional monetary policies may have had the side effect of reducing the profitability of banks by lowering lending rates.

Suggested Citation

  • Atsuki Hirata & Sohei Kaihatsu & Yoshiyasu Kasai & Hiroki Yamamoto & Jouchi Nakajima, 2024. "Effects and Side Effects of Unconventional Monetary Policy: A Shadow Rate Approach," Bank of Japan Working Paper Series 24-E-21, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp24e21
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    More about this item

    Keywords

    Monetary policy; Term structure model; Shadow rate; FAVAR; Counterfactual analysis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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