Effects and Side Effects of Unconventional Monetary Policy: A Shadow Rate Approach

Atsuki Hirata, Sohei Kaihatsu, Yoshiyasu Kasai, Hiroki Yamamoto and Jouchi Nakajima
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Atsuki Hirata: Bank of Japan
Yoshiyasu Kasai: Bank of Japan
Hiroki Yamamoto: Bank of Japan
Jouchi Nakajima: Hitotsubashi University

No 24-E-21, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Over the past 25 years, the Bank of Japan has conducted a variety of unconventional monetary policies. This paper empirically analyzes the impact of these unconventional monetary policies on Japan's economic activity, prices, and financial sector. First, we investigate the impact of the Bank of Japan's purchase of long-term JGBs on long-term interest rates and find that it lowered the rates by lowering the term premium. Its impact was particularly pronounced following the introduction of Quantitative and Qualitative Monetary Easing (QQE) in 2013. Second, we employ a factor-augmented vector autoregression (FAVAR) and the shadow rates as a proxy of a monetary policy stance reflecting information on the entire government bond yield, and investigate the counterfactual analyses. Our estimation result indicates that the series of unconventional monetary policies had a positive effect on output and prices, and the large-scale monetary easing after the introduction of QQE contributed to fostering a non-deflationary environment in Japan. The empirical analysis also indicates that the unconventional monetary policies may have had the side effect of reducing the profitability of banks by lowering lending rates.

Keywords: Monetary policy; Term structure model; Shadow rate; FAVAR; Counterfactual analysis (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2024-12-20
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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