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Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective

Parantap Basu and Kenji Wada
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Kenji Wada: Professor, Faculty of Business and Commerce, Keio University (E-mail: kwada@fbc.keio.ac.jp)

No 18-E-12, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: In this paper, we set up a medium scale new-Keynesian dynamic stochastic general equilibrium (DSGE) model to analyze the effects of various phases of unconventional monetary policy (UMP) on the Japanese bond market. Our model has two novel features: (i) a banking friction in the form of an aggregate bank run risk to motivate commercial banks' demand for excess reserve, and (ii) dynamic linkage between Central Bank resource constraint and the government budget constraint via a transfer payment by the Central Bank to the Treasury. We do three policy simulations to analyze the effects of various phases of UMP shocks on the bond market, namely: (i) effect of a quantitative easing (QE) shock; (ii) the effect of a negative shock to the overnight borrowing rate; and (iii) the effect of a negative shock to the interest rate on banks' excess reserve (IOER). In light of these results, we do an evaluation of the recent yield curve control policy of the Bank of Japan.

Keywords: QE; QQE; Excess Reserve; Overnight Borrowing Rate; IOER; Yield Curve Control (search for similar items in EconPapers)
JEL-codes: E43 E44 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2018-08
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