IDEAS home Printed from https://ideas.repec.org/a/eee/jjieco/v22y2008i1p34-67.html
   My bibliography  Save this article

On the function of the zero interest rate commitment: Monetary policy rules in the presence of the zero lower bound on interest rates

Author

Listed:
  • Oda, Nobuyuki
  • Nagahata, Takashi

Abstract

We analyze the monetary policy rules which could be implemented in practice under the zero interest rate constraint. Based on the estimated small structural model for Japanese economy, we investigate which policy rule is superior using stochastic simulations. We modify the estimated Taylor-type rule variously by adding a commitment whereby the zero rate policy will be maintained until the inflation rate rises beyond a specific level. We find that such policy rules can be effective if the commitment is set appropriately. We also find that a nonlinear policy rule incorporating preemptive easing can perform well, mostly without any explicit commitment. J. Japanese Int. Economies 22 (1) (2008) 34-67.

Suggested Citation

  • Oda, Nobuyuki & Nagahata, Takashi, 2008. "On the function of the zero interest rate commitment: Monetary policy rules in the presence of the zero lower bound on interest rates," Journal of the Japanese and International Economies, Elsevier, vol. 22(1), pages 34-67, March.
    • Handle: RePEc:eee:jjieco:v:22:y:2008:i:1:p:34-67
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0889-1583(07)00014-7
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
    4. Kato, Ryo & Nishiyama, Shin-Ichi, 2005. "Optimal monetary policy when interest rates are bounded at zero," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 97-133, January.
    5. Coenen Günter & Orphanides Athanasios & Wieland Volker, 2004. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-25, February.
    6. Fujiki, Hiroshi & Shiratsuka, Shigenori, 2002. "Policy Duration Effect under the Zero Interest Rate Policy in 1999-2000: Evidence from Japan's Money Market Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(1), pages 1-31, January.
    7. Baba, Naohiko & Nishioka, Shinichi & Oda, Nobuyuki & Shirakawa, Masaaki & Ueda, Kazuo & Ugai, Hiroshi, 2005. "Japan's Deflation, Problems in the Financial System, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(1), pages 47-111, February.
    8. ,, 2004. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 20(2), pages 427-429, April.
    9. Peter Hollinger, "undated". "The Stacked-Time Simulator in TROLL: A Robust Algorithm for Solving Forward-Looking Models," Computing in Economics and Finance 1996 _026, Society for Computational Economics.
    10. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
    11. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-835, October.
    12. Kimura, Takeshi & Kurozumi, Takushi, 2004. "Effectiveness of history-dependent monetary policy," Journal of the Japanese and International Economies, Elsevier, vol. 18(3), pages 330-361, September.
    13. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October.
    14. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    15. Nobuyuki Oda & Kazuo Ueda, 2007. "The Effects Of The Bank Of Japan'S Zero Interest Rate Commitment And Quantitative Monetary Easing On The Yield Curve: A Macro‐Finance Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(3), pages 303-328, September.
    16. Oda, Nobuyuki & Okina, Kunio, 2001. "Further Monetary Easing Policies under the Non-negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan's Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 323-360, February.
    17. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    18. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    19. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
    20. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    21. Takeshi Kimura & Hiroshi Kobayashi & Jun Muranaga & Hiroshi Ugai, 2003. "The effect of the increase in the monetary base of Japan's economy at zero interest rates: an empirical analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 276-312, Bank for International Settlements.
    22. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    23. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    24. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    25. ,, 2004. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 20(1), pages 223-229, February.
    26. Sack, Brian, 2000. "Does the fed act gradually? A VAR analysis," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 229-256, August.
    27. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
    28. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fukuda, Shin-ichi, 2015. "Abenomics: Why was it so successful in changing market expectations?," Journal of the Japanese and International Economies, Elsevier, vol. 37(C), pages 1-20.
    2. Harimaya, Kozo & Jinushi, Toshiki, 2023. "The effects of quantitative easing policy on bank lending: Evidence from Japanese regional banks," Japan and the World Economy, Elsevier, vol. 67(C).
    3. Kim, Tae-Hwan & Mizen, Paul, 2010. "Estimating monetary reaction functions at near zero interest rates," Economics Letters, Elsevier, vol. 106(1), pages 57-60, January.
    4. Kiesel, Konstantin & Wolters, Maik H., 2014. "Estimating monetary policy rules when the zero lower bound on nominal interest rates is approached," Kiel Working Papers 1898, Kiel Institute for the World Economy (IfW Kiel).
    5. Dai, Meixing, 2011. "Quantitative and credit easing policies at the zero lower bound on the nominal interest rate," MPRA Paper 28129, University Library of Munich, Germany.
    6. Carrillo, J.A. & Poilly, C., 2010. "Investigating the zero lower bound on the nominal interest rate under financial instability," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    7. Naoko Hara & Takeshi Kimura & Kunio Okina, 2008. "Monetary Policy Framework and "Insurance Against Deflation"," Bank of Japan Working Paper Series 08-E-6, Bank of Japan.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nobuyuki Oda & Takashi Nagahata, 2005. "On the Function of the Zero Interest Rate Commitment: Monetary Policy Rules in the Presence of the Zero Lower Bound on Interest Rates," Bank of Japan Working Paper Series 05-E-1, Bank of Japan.
    2. Hiroshi Ugai, 2007. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(1), pages 1-48, March.
    3. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    4. Ippei Fujiwara & Naoko Hara & Naohisa Hirakata & Shinichiro Watanabe & Kentaro Yoshimura, 2005. "Monetary Policy in a Liquidity Trap: What Have We Learned, and to What End?," International Finance, Wiley Blackwell, vol. 8(3), pages 471-508, December.
    5. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
    6. Dai, Meixing, 2011. "Quantitative and credit easing policies at the zero lower bound on the nominal interest rate," MPRA Paper 28129, University Library of Munich, Germany.
    7. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    8. Thanaset Chevapatrakul & Tae‐Hwan Kim & Paul Mizen, 2009. "The Taylor Principle and Monetary Policy Approaching a Zero Bound on Nominal Rates: Quantile Regression Results for the United States and Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1705-1723, December.
    9. Fuchi, Hitoshi & Oda, Nobuyuki & Ugai, Hiroshi, 2008. "Optimal inflation for Japan's economy," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 439-475, December.
    10. Hiroshi Ugai, 2006. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Bank of Japan Working Paper Series 06-E-10, Bank of Japan.
    11. John C. Williams, 2009. "Heeding Daedalus: Optimal Inflation and the Zero Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 1-49.
    12. Hess Chung & Jean-Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, February.
    13. John C. Williams, 2020. "The Research–Policy Nexus: ZLB, JMCB, and FOMC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 601-605, December.
    14. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    15. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    16. Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
    17. Fujiwara, Ippei & Nakajima, Tomoyuki & Sudo, Nao & Teranishi, Yuki, 2013. "Global liquidity trap," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 936-949.
    18. Mehrotra, Aaron, 2009. "The case for price level or inflation targeting--What happened to monetary policy effectiveness during the Japanese disinflation?," Japan and the World Economy, Elsevier, vol. 21(3), pages 280-291, August.
    19. Peter J. Morgan, 2012. "The Role and Effectiveness of Unconventional Monetary Policy," Chapters, in: Masahiro Kawai & Peter J. Morgan & Shinji Takagi (ed.), Monetary and Currency Policy Management in Asia, chapter 2, Edward Elgar Publishing.
    20. repec:csg:ajrcwp:04 is not listed on IDEAS
    21. Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, pages 131-1997, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:22:y:2008:i:1:p:34-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622903 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.