Estimating Monetary Reaction Functions at Near Zero Interest Rates: An Example Using Japanese Data

The importance of truncated distributions for bias in estimation of regression coefficients has been well understood by econometricians, but the relevance of truncation when estimating policy reaction functions has not been fully appreciated. Due to the emergence of low interest rates and the proximity of a zero lower bound (ZLB) on interest rates, coefficient estimates can be biased upwards. This paper illustrates the importance of measuring and correcting estimates for this bias using Japan’s unique experience of prolonged low inflation/deflation. While we would expect the monetary policy reaction function in Japan to differ from other countries in the G4, we show the bias from truncation of the interest rate distribution is significant and needs to be taken into account.Monetary policy, Reaction functions, Zero lower bounds, Japan, Tobit.

An Open Economy Model of the Credit Channel Applied to Four Asian Economies

This paper provides a theoretical model of an open economy credit channel including currency mismatch and financial fragility where exporting firms have access to international credit but non-exporting firms do not. It considers the post-crisis outcome which is predicted to be dramatically different for exporters/non-exporters. We examine firms’ access to external finance in four Asian economies after 1997 using a large panel of balance sheet data. Our paper demonstrates that firm heterogeneity is critical to understanding the open economy credit channel effects post-crisis since smaller and less profitable firms are indeed less likely to obtain credit than larger, export-oriented firms.Credit Channel, External Finance, Asian Crisis.