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Monetary policy in Japan: a structural VAR analysis

  • Kenneth Kasa
  • Helen Popper

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.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 95-12.

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Date of creation: 1995
Date of revision:
Publication status: Published in Journal of the Japanese and International Economies (September 1997, v. 11, no. 3, pp. 275-95)
Handle: RePEc:fip:fedfpb:95-12
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  1. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  2. Eijffinger, S.C.W., 1992. "The Japanese financial system and monetary policy : A descriptive review," Other publications TiSEM 0760249a-e78c-487b-9214-0, Tilburg University, School of Economics and Management.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  4. 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.
  5. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  6. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  7. 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, vol. 11(2), pages 1-45, December.
  8. 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.
  9. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  10. 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.
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