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Monetary Policy Effectiveness under the Ultra-Low Interest Rate Environment: Evidence from Yield Curve Dynamics in Japan

Author

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  • Shigenori Shiratsuka

    (Faculty of Economics, Keio University)

Abstract

In this paper, I examine the effectiveness of monetary policy under the ultra-low interest rate environment in Japan through the lens of yield curve dynamics. To that end, I employ the dynamic Nelson-Siegel model with time-varying parameters, thereby computing indicators for tracing the easing effects of monetary policy. I show that the estimation performance of the yield curve models is sufficiently improved even under the ultra-low interest rate environment by extending the dynamic Nelson-Siegel model to allow a loading parameter to vary over time, in addition to three parameters of yield curve dynamics: level, slope, and curvature. However, I also demonstrate that the identification of the level and loading parameters is critical in assessing monetary policy effects based on the estimation results for the yield curve dynamics. I reveal that monetary easing effects under the Quantitative and Qualitative Monetary Easing (QQE) are produced by flattening the yield curve in the ultra-long-term maturities over 10-year while easing effects from maturities shorter than 10-year remain almost unchanged. I argue that monetary policy fails to produce sufficient easing effects within the time frame of the standard macroeconomic stabilization policy, even with the full-fledged implementation of unconventional monetary policy measures under the current ultra-low interest rate environment.

Suggested Citation

  • Shigenori Shiratsuka, 2021. "Monetary Policy Effectiveness under the Ultra-Low Interest Rate Environment: Evidence from Yield Curve Dynamics in Japan," Keio-IES Discussion Paper Series 2021-012, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:2021-012
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    References listed on IDEAS

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    Cited by:

    1. Koeda, Junko & Sekine, Atsushi, 2022. "Nelson–Siegel decay factor and term premia in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Yield curve; Dynamic Nelson-Siegel model; Loading parameter; Unconventional monetary policy; Monetary policy indicator;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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