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Quantitative Easing, Credibility and the Time-Varying Dynamics of the Term Structure of Interest rate in Japan

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Listed author(s):
  • Yusho Kagraoka

    ()

    (Musashi University - Musashi University)

  • Zakaria Moussa

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - CNRS - Centre National de la Recherche Scientifique)

Abstract

A key issue in current research about quantitative easing monetary policy (QEMP) is the ability of this strategy to impact the term structure of interest rates. Using a dynamic model for the yield curve with time-varying-parameters to the Japanese data, we provide three insights. First, the expectations hypothesis of the term structure of interest rates is generally supported even during the QEMP period. Second, the estimation results reveal that the contribution of macroeconomic variables on the variation of the yield curve is relatively small, especially during the QEMP period. As for the feed-back effect, the yield curve factors contribute only marginally to inflation variation. However, they account for more relevant part of output gap dynamics. Third, the monetary policy shock has a significant effect on yield curve level factor only during the high interest rates periods. However, the decline in the level factor during the QEMP period, while insignificant, indicates a strengthening credibility of the Bank of Japan and thus the effectiveness of its policy.

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Paper provided by HAL in its series Working Papers with number halshs-00543010.

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Date of creation: 05 Dec 2010
Handle: RePEc:hal:wpaper:halshs-00543010
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Keywords: Quantitative Easing Policy; Macro-finance model; Time-varying-parameter VAR; Japan; Expectation channel;

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Find related papers by JEL classification:
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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Cited by:

  1. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2015. "The expectations hypothesis and decoupling of short- and long-term US interest rates: A pairwise approach," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 301-313.

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