Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach

Jouchi Nakajima

No 11-E-08, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper attempts to explore monetary policy transmission under zero interest rates by explicitly incorporating the zero lower bound (ZLB) of nominal interest rates into the time-varying parameter structural vector autoregression model with stochastic volatility (TVP- VAR-ZLB). Nominal interest rates are modeled as a censored variable with Tobit-type non-linearity and incorporated into the TVP-VAR framework. For estimation, an efficient Markov chain Monte Carlo (MCMC) method is constructed in the context of Bayesian inference. The model is applied to the Japanese macroeconomic data including the periods of the zero interest rates policy and the quantitative easing policy. The empirical results show that a dynamic relationship between monetary policy and macroeconomic variables is well detected through changes in medium-term interest rates, and not policy interest rates under the ZLB, although other macroeconomic dynamics are reasonably traced without considering the ZLB in an explicit manner.

Keywords: Monetary policy; Zero lower bound of nominal interest rates; Markov chain Monte Carlo; Time-varying parameter vector autoregression with stochastic volatility (search for similar items in EconPapers)
JEL-codes: C11 C15 E44 E52 E58 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Journal Article: Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:11-e-08

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