RIEB Discussion Paper Series No.2020-15

Title

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

Abstract

This study reviews and assesses the monetary policy implemented by the Bank of Japan (BOJ), focusing on policies that employ short-term interest rates as the operational target. Our review of empirical studies on monetary policy that inﬂuenced the BOJ's policy reveals that they focused on (1) banking system and interest rate mechanisms, (2) ﬁnancial dereg-ulation and monetary aggregates, (3) the systematic reaction regarding the achievement of the ultimate goal, and (4) conﬁrming how certain evidence serves as material for policy judgments and communication with the public. 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. Even small policy rate cuts in a low-interest-rate environment make signiﬁcant contributions to economic recovery.

Keywords

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

Inquiries

Masahiko SHIBAMOTO
Research Institute for Economics and Business Administration(RIEB)
Center for Computational Social Science (CCSS)
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
Email: shibamoto@rieb.kobe-u.ac.jp

Wataru TAKAHASHI
Faculty of Economics
Osaka University of Economics

Takashi KAMIHIGASHI
Research Institute for Economics and Business Administration(RIEB)
Center for Computational Social Science (CCSS)
Kobe University