Effectiveness and Transmission Mechanisms of Japan's Quantitative Monetary Easing Policy

Abstract

This study analyzes the overall economic impact and transmission mechanisms of Japan's quantitative monetary easing policy (QMEP) based on Honda, Kuroki, and Tachibana (2007). A vector auto regression (VAR) model analysis has led to the following four observations. First, an increase of base money raises aggregate output. Second, the impact of the QMEP is primarily transmitted through the channels of asset prices and bank balance sheets. Not verified are the transmission channels of the bank's information production, exchange rate, or the policy duration effect. These findings confirm the results of Honda, Kuroki, and Tachibana (2007). but the identification of bank balance sheets as a transmission channel represents a new finding. Additionally, these channels were reaffirmed even when subject to more rigorous analysis. Third, the QMEP raises interest rates in the long term, which raises doubt about the validity of the policy duration effect and, in particular, the signaling effect. Fourth, even during the period when a traditional interest rate policy was being implemented, base money had an effect on aggregate output. These results suggest that Japan's monetary policy has been an effective means of easing Japan's prolonged economic downturn.