Has the effect of monetary policy changedduring 1990s?: An Application of Identified Markov Switching Vector Autoregression to the Impulse Response Analysis When the Nominal Interest Rate is Almost Zero

I study whether the effect of monetary policy has changed during 1990s and the zero bound of nominal interest rate may have some distortional effect on macroeconomic dynamics. In order to check the existence of structural change without any prior knowledge on break point and to be able to compare the effect of monetary policy before and after the break without any distortion from the difference in degrees of freedom caused by the different estimated periods, the identi ed Markov switching vector autoregression model is estimated. The result shows that there is a structural change in 1990s and the effect of monetary policy has become weaker since then. As obvious, traditional interest rate channel is not functioning and therefore the role of monetary expansion is limited now. Another intriguing by-product is that the conventional puzzles with identi ed VAR, namely price puzzle and liquidity puzzle, are often re- solved in one regime, but not in the whole sample. This nding may have some implication for the cause of those puzzles, the coexistence of equi- librium dynamics and disequilibrium dynamics in economic time series.