Good Luck or Not: Bank of Japan’s Monetary Policy

Kohei Hasui and Yuki Teranishi

No HIAS-E-149, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: This paper evaluates whether the Bank of Japan (BOJ)’s “Inflation-Overshooting Commitment” can work to raise inflation rates by over 2 percent to end the zero interest rate policy or whether cost-push shocks luckily give a chance of high inflation rates for the BOJ to escape a liquidity trap. We show that the Taylor-type rule can not replicate inflation overshooting, even though the zero interest rate policy continues as the BOJ’s monetary policy. However, the Taylor-type rule achieves about a 2 percent target in the end, and the cost-push shocks work as good luck to induce high inflation data and justify the escape from a liquidity trap. In the case of the price-level targeting policy, inflation rates increase by more than 2 percent, and the zero interest rate policy continues even after inflation rates sufficiently exceed 2 percent. Under the price-level targeting policy, the cost-push shocks give little good luck in terminating the zero interest rate policy earlier. Our simulation results imply that the BOJ successfully excludes the effect of positive cost-push shocks to implement the exit policy and conducts the history-dependent policy under inflation-overshooting commitment. Our results do not change for a variety of Japanese parameters for the anchored level of inflation rate, elasticity of demand to real interest rate, and inflation persistence. Moreover, the augmented Taylor-type rule with a strong history dependence can work as a price-level targeting policy.

Keywords: monetary policy; commitment; liquidity trap (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2025-08
New Economics Papers: this item is included in nep-cba, nep-mon and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-149

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