How do monetary transmission channels influence inflation in the short and long run? Evidence from the QQE regime in Japan

Abstract

This paper investigates the effectiveness of the monetary transmission channels of QQE in stimulating the Japan inflation rate in the short and long run. Using monthly data from 2013 to 2018, our results show evidence of asymmetry effect, in which the impact of each channel on the inflation rate is different in the short and long run. Firstly, Tobin’s q and foreign exchange rate channels yield higher and positive impact on the inflation rate in the long run relative to short run; Secondly, the inflationary effect of interest rate channel is more significant in the short run; Thirdly, the portfolio rebalance channel is found to have a deflationary effect on inflation rate in both the short and long run, in which the deflationary effect is more pronounced in the long run. These empirical findings highlight the importance of the monetary base, capacity utilization ratio and foreign exchange rate in helping the Japanese economy to achieve the inflation target in the short and long run.