THE EFFECTS OF THE BANK OF JAPAN'S ZERO INTEREST RATE COMMITMENT AND QUANTITATIVE MONETARY EASING ON THE YIELD CURVE: A MACRO‐FINANCE APPROACH*

This paper empirically investigates the effects of the Bank of Japan's (BOJ) zero interest rate commitment and quantitative monetary easing on the yield curve. Applying a macro‐finance approach, we decompose interest rates into expectations and risk premium components and extract the market's perception of the BOJ's policy stance. We make clear the counterfactual policy without the BOJ's commitment. We find some evidence that the commitment lowered interest rates and mat raising the reserve target may have been perceived as a signal indicating the BOJ's accommodative policy stance. The portfolio rebalancing effect has not been found to be significant.     

IDEAL AND REAL JAPANESE MONETARY POLICY: A COMPARATIVE ANALYSIS OF ACTUAL AND OPTIMAL POLICY MEASURES*

This paper discusses the successes and failures of Japanese monetary policy by evaluating policies from January 1980 to May 2003 in the light of optimal policy rules. First, we quantitatively conceptualize the Bank of Japan (BOJ)'s policy decisions by employing Bernanke and Mihov's (1998 ) econometric methodology for developing monetary policy measures and term the resulting policy measure the ‘actual policy measure’. Next, assuming that the BOJ is committed to optimal policy rules, we simulate optimal policy paths, which we term ‘optimal policy measures’. We evaluate Japanese monetary policy historically by comparing actual and optimal policy measures.     

PRICE‐LEVEL DETERMINATION UNDER DISPERSED INFORMATION AND MONETARY POLICY*

This paper considers the determination of aggregate price level under dispersed information. A Central Bank sets policy in response to its noisy measure of the price level, and each agent makes its decisions by observing a subset of data. Information revealed to the agents and the bank is determined endogenously. It is shown that the aggregate state of the economy is not revealed perfectly to anybody but this economy behaves as if it is a representative‐agent economy in which the representative agent has perfect information while the Bank has partial information. The Bank's information set affects fluctuations in the price level through its effect on policy.     

USE OF THE MONEY SUPPLY IN THE CONDUCT OF JAPAN'S MONETARY POLICY: RE‐EXAMINING THE TIME‐SERIES EVIDENCE*

This paper re‐examines whether the money supply (M2 + CDs) can predict future economic activity in Japan, using recent data to the end of 2003. I find that the linkage between M2 and income or prices has largely disappeared since the late 1990s. Evidence suggests that (i) time deposit behaviour is primarily responsible for the breakdown in the M2–income relationship; (ii) bank loans also lost their predictive content in the late 1990s; and (iii) there has been a close link between time deposits and bank loans. Non‐performing loans problems and ongoing restructuring may be root causes of these findings.     

AN ANALYSIS OF MONETARY POLICY SHOCKS IN JAPAN: A FACTOR AUGMENTED VECTOR AUTOREGRESSIVE APPROACH*

This paper analyses monetary policy shocks in Japan using a factor augmented vector autoregressive approach. There are three main findings. First, the time lags with which the monetary policy shocks are transmitted vary between the various macroeconomic time series. These include several series that have not been included thus far in standard vector autoregressive analysis, including housing starts and employment indices. Second, a coherent picture of monetary policy effects on the economy is obtained. Third, it is found that monetary policy shocks have a stronger impact on real variables, such as employment and housing starts, than industrial production.     

BANK EFFICIENCY AND THE EFFECTIVENESS OF MONETARY POLICY

Advances in information technology and bank consolidation have altered the way banks operate by necessitating that banks control costs and provide services efficiently to remain competitive. Given the unique role bank operations play in the transmission of monetary policy, a key unresolved question is whether bank efficiency alters monetary policy outcomes. Using a stochastic frontier approach to measure cost‐efficiency and panel data of U.S. bank balance sheets, we show that banks with greater cost‐efficiency are more sensitive to monetary shocks. (JEL E52, E44, E51)     

ROBUST MONETARY POLICY UNDER UNCERTAINTY ABOUT CENTRAL BANK PREFERENCES

In this paper, we study the impact of central bank opacity on macroeconomic performances in a new Keynesian framework with model uncertainty using robust control techniques. We identify a new source of central bank opacity, which refers to the lack of information about the central bank's preference for robustness in the sense of Hansen and Sargent . We find closed‐form solutions for the robust control problem, analysing the impact of the lack of transparency about the central bank's preferences for robustness. We show that an increased transparency about the central bank's preference for robustness makes monetary policy respond less aggressively to cost‐push shocks, thus reducing the inflation and output gap variability. As a consequence, inflation and output gap are less volatile than under central bank opacity about its preference for robustness.     

MICROECONOMIC FOUNDATION OF LENDER OF LAST RESORT FROM THE VIEWPOINT OF PAYMENTS*

We construct a model to clarify the mechanism by which the lender of last resort (LLR) can prevent bank runs. In our model, a bank has both the function of facilitating payments in which inside money is settled using outside money and the function of financial intermediation using a deposit contract. The deposit contract might lead to a bank run, and might even contribute to an efficient allocation. Therefore, to consider the liquidity supply by the LLR, we introduce the deposit contract as a factor of instability in the banking model. We show that the LLR can assist in the recovery of both the efficiency and stability of the financial system.     

THE IMPACTS OF “SHOCK THERAPY” UNDER A BANKING CRISIS: EXPERIENCES FROM THREE LARGE BANK FAILURES IN JAPAN*

A bank failure can have various adverse consequences for clients; these adverse impacts differ depending on which bank takes over the failed banks’ operations. In this paper, we show how the new banks’ management strategies are important in mitigating the short‐ and long‐run consequences. We focus on the clients of three large failed Japanese banks and examine their responses in terms of increased bankruptcies and changes in market valuation after the banks’ operations were taken over. The results imply that the choice of “shock therapy” or “soft budget constraints” had dramatically different consequences in resolving the bad loan problems in Japan.     

The High‐Frequency Responses of Australian Financial Futures to Unexpected Cash Rate Announcements*

This study examines the high‐frequency responses of Australian financial futures to monetary surprises using intra‐day futures data. Using the event window method with tick data to control for the endogeneity between market interest rates and the cash rate, our empirical findings support the following. First, monetary policy announcements significantly impact not only short‐term interest rate futures but also longer‐term treasury security future markets. Second, the most significant responses of these markets occur in the event window that contains the policy announcement. Third, we also find that the monetary policy is not well anticipated by market participants until the Reserve Bank of Australia’s policy release.     

ON NON‐MONETARY MEASURES IN THE FACE OF RISKS AND THE SIGNS OF THE DERIVATIVES

Vulnerability of both prudence and temperance towards a sure loss and towards a zero‐mean background risk seems to be a very realistic assumption on individual preference. This paper shows that when the concepts of prudence and temperance are defined in non‐monetary terms, the above assumption is equivalent to the usual signs of the successive derivatives of the utility function.     

MONETARY EXPANSION AND PRODUCTIVE PUBLIC EXPENDITURE IN A CASH‐IN‐ADVANCE ECONOMY*

Using a dynamic optimization model that incorporates a cash‐in‐advance constraint on both consumption and investment and productive public capital financed by a lump‐sum tax and seigniorage, this paper analyses the steady‐state effects of an increase in the inflation rate (the money growth rate) on output, private capital and welfare. The effects are negative at high inflation rates. However, at low inflation rates, the effects depend on the amount of lump‐sum tax revenue collected and therefore are either positive or negative.     

UK INFLATION: PERSISTENCE, SEASONALITY AND MONETARY POLICY

In the light of the changes to UK monetary policy since the early 1980s, we study the existence and nature of changes in the properties of retail price inflation over this period. A feature of our analysis is the attention paid to the marked seasonal pattern of monthly UK inflation. After taking account of seasonality, both univariate and Phillips curve models provide strong evidence of changes in the level and persistence of inflation around the end of 1992, at the time of the introduction of inflation targeting. Indeed, all models point to the effective disappearance of inflation persistence after this date, implying that constant-parameter models estimated using both pre- and post-inflation targeting data periods should be treated with considerable caution.     

Market‐Based Measures of Monetary Policy Expectations and Their Evolution Since the Introduction of the Euro

The paper considers the relation between monetary policy expectations and financial markets in the case of Europe. A number of money market instruments are compared, with the result that the 1‐month forward interest rates extracted from the Libor yield curve has the best prediction power of the future monetary policy path. These forward rates have been used to study the evolution of market expectations regarding the monetary policy of the European Central Bank (ECB). The sharp increases and the following decreases in interest rates during 2000–2001 have reduced the predictive power of money market instruments, but smoother management of interest rates and better communication from the ECB has helped to improve the forecasting power of money market instruments.     

THE TRANSMISSION OF THE MONETARY POLICY IN THE EURO AREA: THE ROLE OF THE BANKS’ BUSINESS MODEL

This paper sheds some new light on the incidence of the banks’ business model as a component of the bank lending channel in the euro area. Differently from existing literature, the analysis is led on the basis of the two main macroeconomic regions that today characterize the euro area: its north‐east (German‐centric) and south‐west halves. The observation period is 2008–2013, mainly featured by the financial and economic crisis. The empirical findings evidence that in the north‐east half of the euro area the cooperative banks leveraged the effects of the reduction in the interest rates in terms of new lending. In this respect, they differentiated from commercial and savings banks, which showed a more neutral impact on the transmission of the monetary policy decisions. These results highlight the distinctive role of the cooperative banks in terms of credit provision in Germany and in the whole north‐east half of the euro area. Nevertheless, this cooperative banking effect did not emerge for the south‐west half of the continent, particularly hit by the crisis. This may suggest that the bank's business model tend to be neutral to the transmission of the monetary policy in economies characterized by prolonged recessions.     

Response of Asset Prices to Monetary Policy under Abenomics

In this paper, I investigate the causes of the recent sharp response of the yen and Japanese stock prices to the discussion of, and the subsequent implementation of bold monetary easing by the Bank of Japan as demanded by Prime Minister Abe. I present statistical evidence that the response of the two asset prices have indeed been unusually large relative to the past experience with nonconventional monetary policy (NCM) even after allowance is given for the rise in global economic activity and asset prices. I also point out that the rally has been led by speculative trading by foreign investors, while domestic investors have largely stayed on the sidelines. I discuss possible reasons for such foreign investor behavior. Simply put, the unprecedented political pressure raised hopes of the adoption of bold measures by the Bank of Japan. I discuss, however, the possibility that the room for further action by the Bank is quite limited apart from what might be called a targeted helicopter drop of money. I also point out the possibility that investor behavior may have not been based on economic fundamentals. The asset price volatility since April 2013 is interpreted in the light of such discussions.     

Bond risk premiums and optimal monetary policy

The bond yield dynamics implied by a welfare-maximizing monetary policy and its credibility are explored in general equilibrium. Credibility is captured by a regime change from discretion to commitment. The policy determines the optimal output and inflation responses to a source of inflation risk. Bond yields contain compensations for this risk that depend on the policy. Credibility improvements reduce the exposure to inflation risk and bond risk premiums decline. A model calibration implies lower yield spreads, less volatile yields, and reduced deviations from the expectations hypothesis under commitment. The model suggests an explanation for changes in yield dynamics in the U.S. across different policy regimes.     

INCOMPLETE FINANCIAL MARKETS,IRREVERSIBILITY OF INVESTMENTS AND FISCAL AND MONETARY POLICY INSTRUMENTS*

In this paper, we analyse the use of fiscal and monetary instruments to improve long‐run welfare when productive investment is irreversible and uncollateralizable and there is no insurance. Only fiat money or government issued bonds provide self‐insurance. We demonstrate that an increase in precautionary savings reduces irreversible productive investment. Hence, subsidies to promote productive but irreversible investment should be financed in such a way that they do not reduce insurance capability. When lump‐sum subsidies are high, a consumption tax is likely to be more redistributive and thus more consumption smoothing than are the other sets of instruments analysed in our model.