ERI Discussion Paper Series No.94
A Structural VAR analysis of the Monetary Policy in Japan

July 2000
Tsuyoshi Mihira
(Economic Research Institute, Economic Planning Agency)
Shigeru Sugihara
(Economic Research Institute, Economic Planning Agency)


This paper aims to measure the stance of monetary policy and its quantitative effect on the economy in Japan using the structural VAR approach.

We have estimated a number of structural VARs by changing endogenous variables included in the model, and by changing identifying restrictions. Five among them are presented in this paper. Most of the employed identifying restrictions assume the call rate targeting policy by the Bank of Japan (BOJ), and therefore monetary policy is measured by interest rate changes (innovations). We tested the plausibility of the interest rate targeting with the model that incorporate the bank reserve market. The results mostly support the call rate targeting.

Among all the estimated models, we found that the block-recursive model that includes the domestic WPI as a 'sensitive price' variable (which is supposed to precede the movement of general price) is the most plausible one. This implies that the BOJ is watching the domestic WPI carefully to judge the future inflationary pressure when formulating its policy.

Next we measured the historical changes of the BOJ's monetary policy stance using this WPI model. We found that the monetary policy was more expansionary than the usual policy reaction in late 80s, and tighter than usual in most of 90s (at least up to 1995 when the official discount rate was reduced to the historical 0.5%). This may seem to support the notion that the BOJ's monetary policy had been the major causes of the rise and fall of the bubble economy, and the prolonged recession after that. However, we also found that the effect of such monetary policy was not quantitatively very large. It accounts for only about 3~6% of the total output fluctuations during the period. Some robustness tests for these results, including the test of structural change in 90s, are also presented.

Structure of the whole text(PDF-Format 3file)

  1. Abstract別ウィンドウで開きます。(PDF-Format 454 KB)
  2. page1
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    1. Structural VAR Approach
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    2. Comparison of Different Identifying Restrictions
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    1. page46
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