Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model

Satoshi Hoshino and Daisuke Ida

MPRA Paper from University Library of Munich, Germany

Abstract: This paper reevaluates the role of asset price stabilization in Japan during the 1980s through a Bayesian estimation of the dynamic stochastic general equilibrium model. Our results show the presence of the wealth channel from increased stock prices in Japan. In addition, we argue the possibility that the Bank of Japan (BOJ) may have conducted its monetary policy by targeting the stock price stability in addition to inflation and the output gap. The BOJ's response to stock price movements as a matter of policy, however, is subject to considerable uncertainty. Our results indicate that while the BOJ may have reacted to stock prices deviated from their fundamental values, it could not prevent a stock price bubble simply by implementing a contractionary monetary policy shock. Therefore, we conclude that the BOJ's monetary policy stance aimed at stabilizing stock price fluctuations and minimizing macroeconomic volatility, whereas endogenous volatility was caused by bad shocks.

Keywords: Monetary policy; Bayesian estimation; DSGE model; Stock prices; Wealth effect (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2021-04-21
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Working Paper: Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:107301

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