Working Papers

Japanese Monetary Policy under Quantitative Easing

Japanese Monetary Policy under Quantitative Easing: Neo-Wicksellian versus Monetarist Interpretations.  Paper for the 2005 Australian Conference of Economists, University of Melbourne, 26-28 September.

Abstract:  This paper examines Japanese monetary policy under the ‘quantitative easing’ regime since March 2001.  The policy commitments and operating procedures adopted under this regime have been conditioned on a conventional neo-Wicksellian view of the monetary transmission process, which sees the problem of monetary policy at the zero bound on nominal interest rates as primarily one of expectations management.  However, central bank policies are unlikely to be credible in the absence of a compelling account of the underlying monetary policy transmission mechanism at the zero bound.  The neo-Wicksellian approach undermines the credibility on which it depends by advancing an irrelevance proposition for open market purchases at the zero bound.  Japan’s experience with the zero bound illustrates many of these problems.  We argue instead for a monetarist interpretation of the transmission mechanism that is more robust to an environment in which central bank credibility and conventional policy instruments have been exhausted.  The BoJ should condition its policy commitments and operating procedures on this view of the transmission process. The neo-Wicksellian and monetarist approaches are potentially complementary.


posted on 05 August 2005 by skirchner

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