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Effects of the Loss and Correction of a Reference Rate on Japan's Economy and Financial System: Analysis Using the Financial Macro-econometric Model

Author

Listed:
  • Hiroshi Kawata

    (Bank of Japan)

  • Tomiyuki Kitamura

    (Bank of Japan)

  • Koji Nakamura

    (Bank of Japan)

  • Yuki Teranishi

    (Bank of Japan)

  • Saiki Tsuchiya

    (Bank of Japan)

Abstract

This paper analyzes the effects on the financial system and the real economy of errors in a reference rate, and the subsequent rapid corrections of the rate. In this analysis, we use the Financial Macro-econometric Model, which reflects an adverse feedback loop between the financial system and the real economy. The main results are as follows. First, fluctuations of financial and economic activity may increase significantly when there is no correct and reliable reference rate and individual financial institutions extend loans based on different market rate indicators. Second, the transmission mechanism of monetary policy may weaken in the absence of a reference rate. And third, when errors are found in a reference rate, the subsequent upward corrections at a rapid pace may affect the real economy to a notable extent. The effects of the corrections can grow especially if such corrections occur at the time of a financial crisis. These results suggest that a correct and reliable reference rate is important for maintaining stability in the macroeconomy.

Suggested Citation

  • Hiroshi Kawata & Tomiyuki Kitamura & Koji Nakamura & Yuki Teranishi & Saiki Tsuchiya, 2012. "Effects of the Loss and Correction of a Reference Rate on Japan's Economy and Financial System: Analysis Using the Financial Macro-econometric Model," Bank of Japan Working Paper Series 12-E-11, Bank of Japan.
    • Handle: RePEc:boj:bojwps:12-e-11
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    References listed on IDEAS

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    1. Atsushi Ishikawa & Koichiro Kamada & Yoshiyuki Kurachi & Kentaro Nasu & Yuki Teranishi, 2012. "Introduction to the Financial Macro-econometric Model," Bank of Japan Working Paper Series 12-E-1, Bank of Japan.
    2. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
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    Cited by:

    1. Shun Kobayashi, 2012. "Application of a Search Model to Appropriate Designing of Reference Rates: Actual Transactions and Expert Judgment," Bank of Japan Working Paper Series 12-E-13, Bank of Japan.
    2. Heung Soon Jung & Dong Jin Lee & Tae Hyo Gwon & Se Jin Yun, 2015. "Reference Rates and Monetary Policy Effectiveness in Korea," Working Papers 2015-27, Economic Research Institute, Bank of Korea.

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