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The effectiveness of conventional and unconventional monetary policy: Evidence from a structural dynamic factor model for Japan

Max Hanisch

Journal of International Money and Finance, 2017, vol. 70, issue C, 110-134

Abstract: I investigate the effectiveness of both conventional and unconventional Japanese monetary policy measures targeting either the short-term interest rate or the monetary base. Using a 1985–2014 data set covering 135 variables, the analysis is based on a structural dynamic factor model. An expansionary monetary policy shock, identified via theoretically plausible sign restrictions, is found to significantly increase real and nominal economic activity. With regard to the policy instrument, its effectiveness differs. A shock that decreases the short-term interest rate has a strong positive effect on output and a modest effect on prices. A monetary policy shock that raises the monetary base has a positive – but weak and rather transitory – effect on output, and a strong effect on goods and stock prices.

Keywords: Structural factor model; Sign restrictions; Monetary policy; Quantitative easing; Zero lower bound; Japan (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Date: 2017
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