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Japan's Monetary Policy: A Literature Review and Empirical Assessment

Author

Listed:
  • Masahiko Shibamoto

    (Research Institute for Economics and Business Administration, Kobe University, Japan)

  • Wataru Takahashi

    (Faculty of Economics, Osaka University of Economics, Japan)

  • Takashi Kamihigashi

    (Research Institute for Economics and Business Administration, Kobe University, Japan)

Abstract

Although various studies examine how monetary policy affects the economy using real-world data, a consensus has yet to be reached. This study reviews and assesses the monetary policy implemented by the Bank of Japan, focusing on policies that employ short-term interest rate as the operational target. Our review of empirical studies on monetary policy that influenced the policy of the Bank of Japan prior to and during the 1980s reveals that the studies focused on (1) bank behavior, (2) the interest rate mechanism, (3) financial deregulation and monetary aggregates, and (4) the systematic reaction regarding the achievement of the ultimate goal. Our empirical results on the causal effect of monetary policy in the framework of a structural vector autoregressive model attest to the significant impact of Japan’s monetary policy on the financial market and macroeconomy from the 1980s onward. Our counterfactual simulations affirm that the central bank should consistently shift its policy stance to achieve macroeconomic stability. Moreover, even tiny policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery.

Suggested Citation

  • Masahiko Shibamoto & Wataru Takahashi & Takashi Kamihigashi, 2020. "Japan's Monetary Policy: A Literature Review and Empirical Assessment," Discussion Paper Series DP2020-15, Research Institute for Economics & Business Administration, Kobe University, revised Jul 2020.
  • Handle: RePEc:kob:dpaper:dp2020-15
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2020-15.pdf
    File Function: Revised version, 2020
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    References listed on IDEAS

    as
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    Keywords

    Japanese macroeconomy; Short-term interest rate; Causal effect of monetary policy; Counterfactual simulation; Vector autoregressive model;
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