The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach

Bank of Japan Working Paper No. 05-E-6

36 Pages Posted: 27 Apr 2005

See all articles by Nobuyuki Oda

Nobuyuki Oda

Bank of Japan - Institute for Monetary and Economic Studies; Kyorin University

Kazuo Ueda

University of Tokyo - Faculty of Economics

Date Written: April 2005

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 medium- to 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.

Keywords: Zero interest rate policy (ZIRP), Quantitative monetary easing policy (QMEP), Zero interest rate commitment, Policy duration effect, Macro-finance model, Expectations theory, Monetary policy rule

JEL Classification: E43, E52, E58, G12

Suggested Citation

Oda, Nobuyuki and Oda, Nobuyuki and Ueda, Kazuo, The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach (April 2005). Bank of Japan Working Paper No. 05-E-6, Available at SSRN: https://ssrn.com/abstract=707902 or http://dx.doi.org/10.2139/ssrn.707902

Nobuyuki Oda (Contact Author)

Bank of Japan - Institute for Monetary and Economic Studies ( email )

Mitaka-shi, Tokyo
Japan

Kyorin University ( email )

Mitaka-shi, Tokyo
Japan

Kazuo Ueda

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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