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The Japanese Quantitative Easing Policy under Scrutiny: A Time-Varying Parameter Factor-Augmented VAR Model

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  • Moussa, Zakaria

Abstract

Interest rates in several countries have recently been decreased to exceptionally low levels and a Quantitative Easing Monetary Policy (QEMP) has been adopted by most major central banks. In this context this paper is very actual, as it sheds some light on the effectiveness of the Japanese use of QEMP, which is the only experience we can learn from. This paper employs a Time Varying Parameters Factor-Augmented VAR (TVP-FAVAR) model to analyse monetary policy shocks in Japan. This model allows us to explore the effect of QEMP on a large number of variables. Our analysis delivers four main results. First, unsurprisingly, our results suggest that the best model to specify the Japanese monetary policy during the two last decades is a model where all of parameters vary over time. Second, the effect of QEMP on activity and prices is stronger than previously found. In particular, we find a significant price reaction to a monetary policy shock. Third, in contrast to previous work, there is a detectable efficiency of the portfolio-rebalancing channel, which could have a role in transmitting the monetary policy shocks. Fourth, while the policy commitment succeeds in controlling private and business expectations, these effects are not transmitted to the long-end of the yield curve.

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  • Moussa, Zakaria, 2010. "The Japanese Quantitative Easing Policy under Scrutiny: A Time-Varying Parameter Factor-Augmented VAR Model," MPRA Paper 29429, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:29429
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    1. Hiroyuki Ijiri & Yoichi Matsubayashi, 2016. "Quantitative Easing Policy, Exchange Rates and Business Activity by Industry in Japan from 2001-2006," Discussion Papers 1611, Graduate School of Economics, Kobe University.
    2. Troug, Haytem Ahmed & Murray, Matt, 2015. "Quantitative Easing in Japan and the UK An Econometric Evaluation of the Impacts of Unconventional Monetary Policy on the Returns of Aggregate Output and Price Levels," MPRA Paper 68707, University Library of Munich, Germany.

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    More about this item

    Keywords

    Time varying parameters; Factor-Augmented VAR; Japan; Quantitative Easing; Transmission channels;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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