An Econometric Analysis of Unconventional Monetary Policy: The Cases of Japan and United States

Discussion Papers

No.704

by Tsubasa Shibata and Hiroyuki Kosaka

March 2018

ABSTRACT

In the wake of financial crisis, the use by major advanced countries of unconventional monetary policies, such as credit easing (CE) by central banks toward depository banks as well as quantitative easing (QE), is not without controversy. While QE increases the liability side of the central bank's balance sheet by expanding the monetary base, the new phase of CE policy enlarges the asset side by purchasing different types of credit in order to get credit markets functioning. Nevertheless, many studies have not taken this important difference in policy into account. They have shed light on mechanisms of the determination of interest rate but precluded any endogenous movement of items in the balance sheets of central banks. Instead, this paper attempts to construct a financial model, linked to a macro-econometric model, which reflects the central bank’s balance sheet. The two linked models provide a better guide to explaining how a central bank’s monetary policy generates impacts on the real economy via depository banks. By undertaking a comparative assessment of the cases of Japan and the USA, this study conducts scenario simulation using the two linked models. It thereby offers an alternative solution to current monetary policy that aims to tackle the problem of deflation.

Keywords:  Unconventional monetary policy, financial market, macro-econometric model

JEL classification: E10, E17, E44, E52

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