CIRJE-F-336 | "The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach" |
Author Name | Oda, Nobuyuki and Kazuo Ueda |
Date | April 2005 |
Full Paper | PDF file@ |
Remarks | Subsequently published in The Japanese Economic Review, September 2007, Vol. 58, No. 3, 303-328. |
Abstract |
This paper provides an empirical investigation of monetary policy in Japan in the zero
interest rate environment that has held sway since 1999. In particular, we focus on the
effects of the zero interest rate commitment and of quantitative monetary easing on mediumto
long-term interest rates in Japan. In the study we apply a version of the macro-finance
approach, involving a combination of estimation of a structural macro-model and calibration
of time-variant parameters to the yield curve observed in the market. This enables us to
decompose interest rates into expectations and risk premium components and simultaneously
to extract the market's perception of the Bank of Japan's (BOJ's) willingness to carry on its
zero interest rate policy. In the analysis we make clear the counterfactual policy that would
have been practiced in the absence of the actual policies followed by the BOJ since 1999.
From this analysis, we tentatively conclude that the BOJ's monetary policy since 1999 has
functioned mainly through the zero interest rate commitment, which has led to declines in
medium- to long-term interest rates. We also find some evidence that, up until the end of
2003, raising the reserve target may have been perceived as a signal indicating the BOJ's
accommodative policy stance although the size of the effect is not large. The portfolio
rebalancing effect -- either by the BOJ's supplying ample liquidity or by its purchases of
long-term government bonds -- has not been found to be significant. |