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Monetary policy in Japan: a structural VAR analysis

Author

Listed:
  • Kenneth Kasa
  • Helen Popper

Abstract

This paper studies the objectives and operating procedures of the Bank of Japan (BOJ) during the period 1975-94. To do this we adapt Bernanke and Mihov's (1995) structural VAR model, which nests several alternative hypotheses concerning central bank behavior. In particular, the model separately identifies the anticipated and unanticipated components of monetary policy, and is capable of distinguishing between interest rate targeting and various types of reserve targeting. ; Three main results emerge from the analysis. First, no single target can explain the BOJ's behavior. Instead, the BOJ appears to weight both variation in the call money rate and variation in nonborrowed reserves, with the weight on the call money rate increasing over time. Second, there is strong evidence that at times the BOJ has employed 'moral suasion' to counter shocks in the demand for borrowed reserves. However, by the second half of the 1980s, this procedure was no longer being used. Third, plots of the overall stance of monetary policy and its unanticipated component clearly reveal that a sharp monetary contraction occurred between early 1990 and late 1992, with an equally sharp expansion since then. Perhaps surprisingly, both the contraction and the subsequent expansion appear to have occurred largely in response to prevailing economic conditions, rather than as an unanticipated change in policy.

Suggested Citation

  • Kenneth Kasa & Helen Popper, 1995. "Monetary policy in Japan: a structural VAR analysis," Pacific Basin Working Paper Series 95-12, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:95-12
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    References listed on IDEAS

    as
    1. Kazuo Ueda, 1993. "A Comparative Perspective on Japanese Monetary Policy: Short-Run Monetary Control and the Transmission Mechanism," NBER Chapters,in: Japanese Monetary Policy, pages 7-30 National Bureau of Economic Research, Inc.
    2. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, pages 869-902.
    3. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, pages 16-34.
    4. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    5. Eijffinger, Sylvester & van Rixtel, Adrian, 1992. "The Japanese financial system and monetary policy: a descriptive review," Japan and the World Economy, Elsevier, pages 291-309.
    6. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, pages 901-921.
    7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, pages 901-921.
    8. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, pages 1-45.
    9. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, pages 869-902.
    10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc.
    11. Hiroshi Yoshikawa, 1993. "Monetary Policy and the Real Economy in Japan," NBER Chapters,in: Japanese Monetary Policy, pages 121-159 National Bureau of Economic Research, Inc.
    12. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, pages 463-497.
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