Macroeconomic Effects of Monetary Policy in Japan: An Analysis Using Interest Rate Futures Surprises

Abstract

We estimate the effects of monetary policy on the aggregate economy in Japan during the last three decades when the effective lower bound (ELB) on interest rates was occasionally binding. Using monetary policy surprises from the interest rate futures market as the external instrument to identify monetary policy shocks in the VAR model, we show that monetary policy has been effective in Japan for the entire sample period but its effect was more persistent in the ELB regime. Using a New Keynesian model with forward guidance, we further show that our empirical finding is consistent with theoretical predictions.