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Monetary policy spillovers across the Pacific when interest rates are at the zero lower bound

Edda Claus (), Iris Claus () and Leo Krippner ()

No DP2016/08, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: To conduct monetary policy effectively, central banks need to understand the transmission of monetary policy into financial markets. In this paper, we investigate the effects of United States and Japanese monetary policy shocks on their own asset markets, and the spillovers into each other's markets. However, because short-term nominal interest rates have been effectively zero in Japan since January 1998 and the United States from late 2008, monetary policy shocks cannot be quantified by considering observable changes in short-term market interest rates. Therefore, in our analysis we use a shadow short rate - a quantitative measure of overall conventional and unconventional monetary policy that is estimated from the term structure of interest rates. Our results suggest that the operation of monetary policy at the zero lower bound of interest rates alters the transmission of shocks. In particular, we find a limited response of exchange rates during the first episode of unconventional monetary policy in Japan but a significant impact since 2006.

Date: 2016-08
New Economics Papers: this item is included in nep-cba and nep-mon
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