A Structural VAR Analysis of the Monetary Policy Stance in Japan

  • Kazuhiko Nakahira


This paper empirically investigates the validity of the Bank of Japan’s policy stance after the collapse of the “Bubble Economy” by utilizing structural vector autoregression analysis. Specifically, examination of the validity of the “interest rate targeting policy” and the “reserve targeting policy” are conducted with two different identifying restrictions constructed for each policy scheme. Impulse response and forecast error variance decomposition analyses provide affirmative results for the interest rate targeting policy in the sample period of “zero interest rate policy”, while they provide positive findings for the reserve targeting policy in the period of “quantitative easing policy”. On the whole, it can be concluded that the policy stances by the Bank of Japan in the period of concern are valid.


policy stance operating procedure operating variable monetary policy structural vector autoregression 

JEL classification

E52 E58 C32 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Amisano, Gianni, and Carlo Giannini. 1997. Topics in Structural VAR Econometrics, second, revised and enlarged edition, Berlin: Springer-Verlag.CrossRefGoogle Scholar
  2. Bagliano, Fabio C., and Carlo. A. Favero. 1997. “Measuring Monetary Policy with VAR Models: An Evaluation,” CEPR Discussion Paper, No.1743.Google Scholar
  3. Bayoumi, Tamin. 2001. “The Morning After: Explaining the Slowdown in Japanese Growth in 1990s,” Journal of International Economics, Vol.53, pp.241–259.CrossRefGoogle Scholar
  4. Bernanke, Ben S., and Alan S. Blinder. 1992. “The Federal Funds Rate and the Channels of Monetary Transmission,” American Economic Review, Vol.82, No.4, pp.901–921.Google Scholar
  5. Bernanke, Ben S., and Mark Gertler. 1989. “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, Vol.79, No.1, pp.14–31.Google Scholar
  6. Bernanke, Ben S., and Ilian Mihov. 1997. “What Does the Bundesbank Target?,” European Economic Review, Vol.41, No.3, pp.1025–1053.CrossRefGoogle Scholar
  7. Bernanke, Ben S., and Ilian Mihov. 1998a. “Measuring Monetary Policy,” Quarterly Journal of Economics, Vol.113, No.3, pp.869–902.CrossRefGoogle Scholar
  8. Bernanke, Ben S., and Ilian Mihov. 1998b. “The Liquidity Effect and Long-Run Neutrality,” NBER Working Paper Series, No.6608.CrossRefGoogle Scholar
  9. Blanchard, Olivier Jean, and Danny Quah. 1989. “The Dynamic Effects of Aggregate Supply and Demand Disturbances,” American Economic Review, Vol.79, No.4, pp. 655–673.Google Scholar
  10. Blanchard, Olivier Jean, and Mark W. Watson. 1986. “Are Business Cycles All Alike?,” in Gordon, Robert J. (ed.), American Business Cycles: Continuity and Change, Chicago: University of Chicago Press, pp.123–156.Google Scholar
  11. Braun, R. Anton, and Etsuro Shioji. 2006. “Monetary Policy and the Term Structure of Interest Rates in Japan,” Journal of Money, Credit, and Banking, Vol.38, No.1, pp.141–162.CrossRefGoogle Scholar
  12. Chinn, Menzie D., and Michael P. Dooley. 1998. “Monetary Policy in Japan, Germany, and the United States: Does One Size Fit All?,” in Freedman, Craig (ed.), Japanese Economic Policy Reconsidered, Cheltenham: Edward Elger, pp.179–217.Google Scholar
  13. Christiano, Lawrence J., and Martin Eichenbaum. 1992. “Identification and the Liquidity Effect of a Monetary Policy Shocks,” in Cukierman, Alex, Zvi Hercowitz, and Leonardo Leiderman (eds), Political Economy, Growth, and Business Cycles, Cambridge, MA: MIT Press, pp.335–370.Google Scholar
  14. Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. 1996. “The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds,” Review of Economics and Statistics, Vol.78, No.1, pp.16–34.CrossRefGoogle Scholar
  15. Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. 1999. “Monetary Policy Shocks: What Have We Learned and to What End?,” in Taylor, John. B., and Michael Woodford (eds.), Handbook of Macroeconomics 3A, Amsterdam: Elsevier Science B. V, pp.65–148.CrossRefGoogle Scholar
  16. Edelberg, Wendy, and David A. Marshall. 1996. “Monetary Policy Shocks and Long-Term Interest Rates,” Economic Perspectives (Federal Reserve Bank of Chicago), No.20, pp.2–17.Google Scholar
  17. Enders, Walter. 2003. Applied Econometric Time Series, 2nd ed., John Wiley & Sons.Google Scholar
  18. Evans, Charles L., and David A. Marshall. 1998. “Monetary Policy and the Term Structure of Nominal Interest Rates: Evidence and Theory,” Carnegie-Rochester Conference Series on Public Policy, Vol.49, pp.53–111.CrossRefGoogle Scholar
  19. Faust, Jon, and Eric M. Leeper. 1997. “When Do Long-Run Identifying Restrictions Give Reliable Results?,” Journal of Business & Economic Statistics, Vol.15, No.3, pp.345–353.Google Scholar
  20. Favero, Carlo A. 2001. Applied Macroeconometrics, Oxford: Oxford University Press.Google Scholar
  21. Fujiki, Hiroshi, Kunio Okina, and Shigenori Shiratsuka. 2001. “Monetary Policy under Zero Interest Rate: View Points of Central Bank Economists,” Bank of Japan Monetary and Economic Studies, Vol.19, No.1, pp.89–130.Google Scholar
  22. Gali, Jordi. 1992. “How Well Does the IS-LM Model Fit Postwar U.S. Data?” Quarterly Journal of Economics, Vol.107, No.2, pp.709–738.CrossRefGoogle Scholar
  23. Gordon, David, B., and Eric M. Leeper. 1994. “The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification,” Journal of Political Economy, Vol.102, No.6, pp.1228–1247.CrossRefGoogle Scholar
  24. Hamilton, James D. 1994. Time Series Analysis, Princeton University Press.Google Scholar
  25. Hutchson, Michael M. 1994. “Asset Price Fluctuations in Japan: What Role for Monetary Policy?” Bank of Japan Monetary and Economic Studies, Vol.12, No.2, pp.61–83.Google Scholar
  26. Iwabuchi, Junichi. 1990. “Kinyu-Hensu ga Jittai-Hensu ni Ataeru Eikyo ni Tsuite-Structural VAR Model ni Yoru Saikensyo,” Kinyu Kenkyu (The Bank of Japan), Vol.9, No.3, pp.79–118. (in Japanese)Google Scholar
  27. Kasa, Ken, and Helen Popper. 1997. “Monetary Policy in Japan: A Structural VAR Analysis,” Journal of the Japanese and International Economies, Vol.11, No.3, pp.275–295.CrossRefGoogle Scholar
  28. Kimura, Takeshi, Hiroshi Kobayashi, Jun Muranaga, and Hiroshi Ugai. 2003. “The Effect of the Increase in the Monetary Base on Japan’s Economy at Zero Interest Rates: An Empirical Analysis,” in Monetary Policy in a Changing Environment, BIS Papers, No.19, pp.276–312.Google Scholar
  29. Kimura, Takeshi, and David Small. 2004. “Quantitative Monetary Easing and Risk in Financial Asset Markets,” Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, No.2004-57.Google Scholar
  30. Kim, Soyoung. 1999. “Do Monetary Policy Shocks Matter in the G-7 Countries? Using Common Identifying Assumptions about Monetary Policy across Countries,” Journal of the Japanese and International Economies, Vol.48, No.2, pp.387–412.CrossRefGoogle Scholar
  31. Lastrapes, William D., and Geoge Selgin. 1995. “The Liquidity Effect: Identifying Short-Run Interest Rate Dynamics Using Long-Run Restriction,” Journal of Macroeconomics, Vol.17, No.3, pp.387–404.CrossRefGoogle Scholar
  32. Leeper, Eric M., Christopher A. Sims, and Tao Zha. 1996. “What Does Monetary Policy Do?,” Brookings Papers on Economic Activity, Vol.27, No.1996-2, pp.1–78.CrossRefGoogle Scholar
  33. Lutkepohl, Helmut, and Markus Kratzig (eds.). 2004. Applied Time Series Econometrics, Cambridge: Cambridge University Press.Google Scholar
  34. Mihira, Tsuyoshi, and Shigeru Sugihara. 2000. “A Structural VAR Analysis of the Monetary Policy in Japan,” Discussion Paper (Economic Research Institute, Economic Planning Agency, Japan), No.94.Google Scholar
  35. Miyao, Ryuzo. 2000. “The Role of Monetary Policy in Japan: A Break in the 1990s?” Journal of the Japanese and International Economies, Vol.14, No.4, pp.366–384.CrossRefGoogle Scholar
  36. Miyao, Ryuzo. 2002. “The Effects of Monetary Policy in Japan,” Journal of Money, Credit, and Banking, Vol.34, No.2, pp.376–392.CrossRefGoogle Scholar
  37. Nakashima, Kiyotaka. 2006. “The Bank of Japan’s Operating Procedures and the Identification of Monetary Policy Shocks: A Reexamination Using the Bernake-Mihov Approach,” Journal of the Japanese and International Economies, Vol.20, No.3, pp.406–433.CrossRefGoogle Scholar
  38. Oda, Nobuyuki, and Kunio Okina. 2001. “Further Monetary Easing Policies Under the Non-Negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan’s Experience,” Monetary and Economic Studies (Special Edition), Vol.19, No.S-1, pp.323–360.Google Scholar
  39. Oda, Nobuyuki, and Kazuo Ueda. 2005. “The Effects of the Bank of Japan’s Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach,” Bank of Japan Working Paper Series, No.05-E-6. 102 International Journal of Economic Policy Studies 103Google Scholar
  40. Okina, Kunio. 1993. “Market Operations in Japan: Theory and Evidence,” in Singleton, Kenneth J. (ed.), Japanese Monetary Policy, Chicago: University of Chicago Press, pp.31–62.Google Scholar
  41. Rudebusch, Glenn. D. 1998. “Do Measures of Monetary Policy in a VAR Make Sense?” International Economic Review, Vol.39, No.4, pp.907–931.CrossRefGoogle Scholar
  42. Shioji, Etsuro. 2000. “Identifying Monetary Policy Shocks in Japan,” Journal of the Japanese and International Economies, Vol.14, No.1, pp.22–42.CrossRefGoogle Scholar
  43. Sims, Christopher A. 1980. “Macroeconomics and Reality,” Econometrica, Vol.48, No.1, pp.1–48.CrossRefGoogle Scholar
  44. Sims, Christopher A. 1992. “Interpreting the Time Series Facts: The Effects of Monetary Policy,” European Economic Review, Vol.6, No.5, pp.975–1011.CrossRefGoogle Scholar
  45. Strongin, Steven. 1995. “The Identification of Monetary Policy Disturbances: Explaining the Liquidity Puzzle,” Journal of Monetary Economics, Vol.35, No.3, pp.463–497.CrossRefGoogle Scholar
  46. Thorbecke, Willem. 1997. “On Stock Market Returns and Monetary Policy,” Journal of Finance, Vol.52, No.2, pp.635–654.CrossRefGoogle Scholar
  47. Ueda, Kazuo. 1993. “A Comparative Perspective on Japanese Monetary Policy: Short-Run Monetary Control and the Transmission Mechanism,” in Singleton, Kenneth J. (ed.) Japanese Monetary Policy, Chicago: University of Chicago Press, pp.7–29.Google Scholar
  48. West, Kenneth D. 1993. “An Aggregate Demand-Aggregate Supply Analysis of Japanese Monetary Policy”, in Singleton, Kenneth J. (ed.) Japanese Monetary Policy, Chicago: University of Chicago Press, pp.161–181.Google Scholar

Copyright information

© Japan Economic Policy Association (JEPA) 2009

Authors and Affiliations

  • Kazuhiko Nakahira
    • 1
  1. 1.Department of Business Administration and InformationTokyo University of ScienceSuwaJapan

Personalised recommendations