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Policy Duration Effect under Zero Interest Rates: An Application of Wavelet Analysis


Kunio Okina


Bank of Japan; National Bureau of Economic Research (NBER)

Shigenori Shiratsuka


Bank of Japan

February 2004

CESifo Working Paper Series No. 1138

Abstract:     
A major feature of recent monetary policy in Japan has been heavy reliance on the so-called policy duration effect. This policy employs a commitment to compensate for the central bank's inability to lower the interest rate below zero by altering the anticipated course of monetary policy actions. This paper analyzes the behavior of the yield curve and examines the effectiveness and limitations of monetary policy commitment under zero interest rates with four indicators for policy duration effect. Specifically, we extend our previous study (Okina and Shiratsuka (2003)) by applying wavelet analysis to indicators for policy duration effect. As in the previous study, the policy duration effect was found to be highly effective in stabilizing market expectations for the path of short-term interest rates, thereby reducing longer-term interest rates and flattening the yield curve. The policy duration effect, however, failed to reverse deflationary expectations in financial markets.

Number of Pages in PDF File: 35

Keywords: zero interest rate policy, quantitative monetary easing, policy duration effects, policy commitment, wavelet analysis

JEL Classification: E31, E43, E52

working papers series


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Date posted: March 24, 2004  

Suggested Citation

Okina, Kunio and Shiratsuka, Shigenori, Policy Duration Effect under Zero Interest Rates: An Application of Wavelet Analysis (February 2004). CESifo Working Paper Series No. 1138. Available at SSRN: http://ssrn.com/abstract=521402

Contact Information

Kunio Okina
Bank of Japan
CPO Box 203
Tokyo, 100-91
Japan
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Shigenori Shiratsuka (Contact Author)
Bank of Japan ( email )
CPO Box 203
Tokyo, 100-91
Japan
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