Central Bank Credibility During COVID-19: Evidence from Japan

Jens Christensen and Mark Spiegel

No 2021-24, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.

Keywords: affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 G17 (search for similar items in EconPapers)
Pages: 38
Date: 2021-12-21
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Journal Article: Central bank credibility during COVID-19: Evidence from Japan (2023)
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DOI: 10.24148/wp2021-24

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