Money, interest rates and economic activity: stylized facts for Japan

Sun Bae Kim and Ramon Moreno

Economic Review, 1993, 12-24

Abstract: This paper examines how financial market changes affect the usefulness of two alternatve indicators of monetary policy in Japan, a monetary aggregate and an interest rate. The paper tests whether these variables are good predictors of output, and whether responses to shocks to these variables broadly conform to the implications of the monetary transmission model, over two periods between 1960 and 1992. In the earlier period when Japan's financial markets were less developed, a monetary aggregate (M2+CDs) is a relatively useful indicator of monetary policy whereas an interest rate variable is not. In particular, we find some evidence of a \"liquidity effect\" in response to innovations in money. Neither variable is an entirely satisfactory indicator of monetary policy in the second sample. The results suggest that financial market development may have contributed to reducing the usefulness of money as an indicator of monetary policy.

Keywords: Monetary policy - Japan; Japan (search for similar items in EconPapers)
Date: 1993
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