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Estimating Monetary Policy Effects When Interest Rates are Bounded at Zero

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  • Shu Wu
  • Shigeru Iwata

Abstract

Using a nonlinear structural VAR approach, we estimate the effects of exogenous monetary policy shocks in the presence of a zero lower bound constraint on nominal interest rates and examine the impact of such a constraint on the effectiveness of counter-cyclical monetary policies based on the data from Japan. We find that when interest rates are at zero, the output effect of exogenous shocks to monetary policy is cut in half if the central bank continues to target the interest rate. The conditional impulse response functions allow us to isolate the effect of monetary policy shocks operating through the interest rate channel when other possible channels of monetary transmission are present

Suggested Citation

  • Shu Wu & Shigeru Iwata, 2004. "Estimating Monetary Policy Effects When Interest Rates are Bounded at Zero," Econometric Society 2004 Far Eastern Meetings 478, Econometric Society.
  • Handle: RePEc:ecm:feam04:478
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    References listed on IDEAS

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    Keywords

    Zero lower bound; monetary transmission; nonlinear VAR.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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