IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Was Japan’s Real Interest Rate Really Too High During the 1990s? The Role of the Zero Interest Rate Bound and Other Factors

  • Ito, Hiro
Registered author(s):

Japan’s more than a decade long “Great Recession†has presented a disconcerting case of what could happen if interest rates are bounded by zero and deflation sets in. Since Krugman (1998), the commonplace observation is that the deflationary situation combined with the zero nominal interest rate has caused elevated real interest rates, thereby nullifying monetary policy. This paper investigates this oft -cited claim and examines whether it is associated with anomalies in the way real interest rates are determined by employing an error correction model (ECM) based on the time-varying parameter model with Markov-switching variances. Using this model it is revealed that during the 1980s both ex ante and ex post rates were often lower than the equilibrium rates, indicating strong and persistent optimism among agents. However in the 1990s the ex ante real interest rate was persistently higher than the equilibrium, indicating the pessimistic expectations among agents. The time-varying speed of convergence to the equilibrium appears to slow down considerably in 1996-99, making the misalignment in the real interest rate process last twice as long as in the 1980s. In addition the analysis using the Smooth Transition Regression (STR) model shows a regime shift in the real rate process in mid-1995, three years before the implementation of the zero interest rate policy. This result suggests that a situation with an extremely low nominal interest rate, even before it reaches the zero bound, may create anomalies or nonlinearity in the effectiveness of monetary policy.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.escholarship.org/uc/item/48k5q6vd.pdf;origin=repeccitec
Download Restriction: no

Paper provided by Center for International Economics, UC Santa Cruz in its series Santa Cruz Center for International Economics, Working Paper Series with number qt48k5q6vd.

as
in new window

Length:
Date of creation: 30 Nov 2003
Date of revision:
Handle: RePEc:cdl:scciec:qt48k5q6vd
Contact details of provider: Web page: http://www.escholarship.org/repec/sccie/

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.:

as in new window
  1. Bliss, Christopher, 1999. "The Real Rate of Interest: A Theoretical Analysis," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 46-58, Summer.
  2. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
  3. repec:cup:cbooks:9780521779654 is not listed on IDEAS
  4. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Blinder, Alan S, 2000. "Monetary Policy at the Zero Lower Bound: Balancing the Risks: Summary Panel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1093-99, November.
  6. Ryo Kato & Shinichi Nishiyama, 2001. "Optimal Monetary Policy When Interest Rates are Bound at Zero," Working Papers 01-12, Ohio State University, Department of Economics.
  7. Jeffrey Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers 94-1, Federal Reserve Bank of Boston.
  8. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  9. Svensson, Lars, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Seminar Papers 687, Stockholm University, Institute for International Economic Studies.
  10. repec:cup:cbooks:9780521770415 is not listed on IDEAS
  11. 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.).
  12. Athanasios Orphanides & Volker Wieland, 1999. "Efficient monetary policy design near price stability," Finance and Economics Discussion Series 1999-67, Board of Governors of the Federal Reserve System (U.S.).
  13. Skalin, Joakim & Teräsvirta, Timo, 1998. "Modelling asymmetries and moving equilibria in unemployment rates," SSE/EFI Working Paper Series in Economics and Finance 262, Stockholm School of Economics, revised 05 Oct 1998.
  14. Allsopp, Christopher & Glyn, Andrew, 1999. "The Assessment: Real Interest Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 1-16, Summer.
  15. Bekdache, Basma, 1999. "The Time-Varying Behaviour of Real Interest Rates: A Re-evaluation of the Recent Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 171-90, March-Apr.
  16. Kenneth N. Kuttner & Adam S. Posen, 2003. "The Difficulty of Discerning What's Too Tight: Taylor Rules and Japanese Monetary Policy," Working Paper Series WP03-10, Peterson Institute for International Economics.
  17. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, 07.
  18. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper 00-03, Federal Reserve Bank of Richmond.
  19. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-76, December.
  20. David Amirault & Brian O'Reilly, 2001. "The Zero Bound on Nominal Interest Rates: How Important Is It?," Working Papers 01-6, Bank of Canada.
  21. Mishkin, Frederic S., 1981. "The real interest rate: An empirical investigation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 151-200, January.
  22. Lundbergh, Stefan & Teräsvirta, Timo, 1998. "Modelling economic high-frequency time series with STAR-STGARCH models," SSE/EFI Working Paper Series in Economics and Finance 291, Stockholm School of Economics.
  23. Alan S. Blinder, 2000. "Summary panel: monetary policy at the zero lower bound: balancing the risks," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1093-1099.
  24. John Huizinga & Frederic S. Mishkin, 1985. "Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates," NBER Working Papers 1678, National Bureau of Economic Research, Inc.
  25. M. Fase, 2005. "On Economics and Religion," De Economist, Springer, vol. 153(1), pages 85-106, December.
  26. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," SSE/EFI Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  27. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  28. Carl E. Walsh, 1987. "Three questions concerning nominal and real interest rates," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-19.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cdl:scciec:qt48k5q6vd. 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: (Lisa Schiff)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.