Has the effect of monetary policy changedduring 1990s?: An Application of Identified Markov Switching Vector Autoregression to the Impulse Response Analysis When the Nominal Interest Rate is Almost Zero

I study whether the effect of monetary policy has changed during 1990s and the zero bound of nominal interest rate may have some distortional effect on macroeconomic dynamics. In order to check the existence of structural change without any prior knowledge on break point and to be able to compare the effect of monetary policy before and after the break without any distortion from the difference in degrees of freedom caused by the different estimated periods, the identied Markov switching vector autoregression model is estimated. The result shows that there is a structural change in 1990s and the effect of monetary policy has become weaker since then. As obvious, traditional interest rate channel is not functioning and therefore the role of monetary expansion is limited now. Another intriguing by-product is that the conventional puzzles with identied VAR, namely price puzzle and liquidity puzzle, are often re- solved in one regime, but not in the whole sample. This nding may have some implication for the cause of those puzzles, the coexistence of equi- librium dynamics and disequilibrium dynamics in economic time series.Markov Switching Model; VAR; Monetary Policy; Price Puzzle; Liquidity Puzzle; Bootstrapping; Zero Bound of Nominal Interest Rate

Is There a Direct Effect of Money?: Money's Role in an Estimated Monetary Business Cycle Model of the Japanese Economy

In this paper, I estimate the monetary business cycle model of the Japanese economy by the method advocated by Ireland (2002a), the max- imum likelihood estimation of the dynamic stochastic general equilibrium model in a state-space representation. The model estimated here includes the direct role of money on output and inflation so that we could study the alternative transmission mecha- nism of monetary policy to traditional interest rate channel, which may even work under the zero nominal interest rate as in Japan now. However, estimation results report that the direct effect of money is extremely small even if there could be. This nding is consistent with the ones obtained for US data in Ireland (2002a) and Euro area in Andres, Lopez-Salido and Valles (2001).Direct Role of Money; Cross-Restriction; Maximum Likelihood Estimation; Dynamic Stochastic General Equilibrium Model

Growth Expectation

For a long time, changes in expectations about the future have been thought to be significant sources of economic fluctuations, as argued by Pigou (1926). Although creating such an expectation-driven cycle (the Pigou cycle) in equilibrium business cycle models was considered to be a difficult challenge, as pointed out by Barro and King (1984), recently, several researchers have succeeded in producing the Pigou cycle by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Seminal research by Christiano, Ilut, Motto and Rostagno (2007) explains the gstock market boom-bust cycles,h characterized by increases in consumption, labor inputs, investment and the stock prices relating to high expected future technology levels, by introducing investment growth adjustment costs, habit formation in consumption, sticky prices and an inflation-targeting central bank. We, however, show that such a cycle is difficult to generate based on ggrowth expectation,h which reflect expectations of higher productivity growth rates. Thus, Barro and King's (1984) prediction still applies.Expectations, Equilibrium Business Cycle, Technological Progress

Evaluating Monetary Policy When Nominal Interest Rates Are Almost Zero

The non-negativity constraint on nominal interest rates may have been a major factor behind a putative structural break in the effectiveness of monetary policy. To check for the existence of such a break without making prior assumptions about timing, and to enable comparison between pre- and post-break monetary policy, we employ an identified Markov switching VAR framework. Estimation results support the existence of a structural break around the time when the de-facto zero nominal interest rate policy was resumed and the effectiveness of monetary policy is seen to weaken since then although slightly positive effects from monetary easing still existMarkov Switching VAR; Monetary Policy

Output Composition of Monetary Policy Transmission Mechanism in Japan

In this paper, I investigate the output composition of monetary policy transmission mechanism in Japan. It is usually thought that the investment channel, namely the process that a change in interest rate alters the cost of capital and therefore investment, is more predominant in Japan. Yet, in the United States, it is commonly argued that the consumption channel through intertemporal substitution is more prevalent than the investment channel. The aim of this paper is twofold; 1) to understand which of the two channels; the consumption channel and the investment channel, is more signicantly predominant in the monetary transmission mechanism of Japan based on the analysis with VAR and DSGE models, and 2) to contribute the research concerning the "Output Composition Puzzle" advocated by Angeloni, Kashyap, Mojon and Terlizzese (2002) for the fact that the consumption channel is more prevalent in the United States but in Euro area investment channel is the predominant driver of output changes. The results obtained from the Japanese models are consistent with our intuitive conclusion that the investment channel is more important.VAR; DSGE; Monetary Policy Transmission; Output Composition Puzzle;

Export shocks and the zero bound trap

When a small open economy experiences a sufficiently large negative export shock, it is vulnerable to falling into a zero bound trap. In addition, such a shock can have very large impact on the economy compared to the case when the zero bound is not a binding constraint. This could be one possible explanation as to why a country like Japan experienced much larger drop in output than the United States during the recent financial crisis.Monetary policy ; Banks and banking, Central ; Global financial crisis ; Interest rates ; Japan

Asian financial linkage: macro-finance dissonance

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activities? In order to answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz (2009) and gauge the degree of interactions in both financial markets and real economic activities among Asian economies.> ; We first show that the degree of the international spillover in stock markets is like cookie-cutter products, namely, uniform, irrespective of the groups of countries, such as G3, NIEs and ASEAN4. This suggests the importance of the globally common shock in stock markets. We, then, discuss the macro-finance dissonance. In stock and bond markets, the US has been the main driver of fluctuations. Regarding real economic activities, China has emerged as an important source of fluctuations.Financial markets ; Economic conditions - Asia ; Stock market

Expectation Shock Simulation with DYNARE

This note demonstrates a tool which is designed for conducting an expectation shock simulation easily with DYNARE.

A Dynamic New Keynesian Life-Cycle Model: Societal Ageing, Demographics and Monetary Policy

In this paper, we first construct a dynamic new Keynesian model that incorporates life-cycle behavior a la Gertler (1999), in order to study whether structural shocks to the economy have asymmetric effects on heterogeneous agents, namely workers and retirees. We also examine whether considerations of life-cycle and demographic structure alter the dynamic properties of the monetary business cycle model, specifically the degree of amplification in impulse responses. According to our simulation results, shocks indeed have asymmetric impacts on different households and the demographic structure does alter the size of responses against shocks by changing the degree of the trade-off between substitution and income effects.Heterogenous Agents, Life-Cycle, New Keynesian Model

Real exchange rate dynamics revisited: a case with financial market imperfections

In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate and monetary policy shocks. This implies that the financial market developments is a key element for understanding real exchange rate dynamics.Foreign exchange ; International finance ; Macroeconomics - Econometric models