Efficiency of Quantitative Easing in Japan during (2001,2006) through Estimation of Precautionary Money Demand-II

Abstract

This paper investigates the effect of "quantitative easing monetary policy (QEMP)" which the Bank of Japan (BOJ) adopted from March 2001 through March 2006, by changing operating target for money market from interest rate to the monetary base that is defined as the sum of "Cash" and "Reserve Deposit at the BOJ". The paper confirms that the monetary policy has contributed to the recovery of the prolonged deflation. First we comparatively investigate economic activities in the usual economy period of (1981,1998) and in the zero interest rate period of (1999,2006), where vector autoregressive (VAR) model of (call rate, exchange rate, stock, nominal GDP, price) is estimated with "call rate" replaced by "Reserve" in the latter period. A monetary easing policy is effective through transmission path of stock market in both periods. Next we decompose money stock into transaction money and precautionary money to evaluate the transmission mechanism of the effect of reserves on the real economy by taking into account the financial anxiety. We have found a quantitative easing shock firstly increase "precautionary money" and secondly raise "Tankan", which dispel the anxiety, and finally attain to "transaction money" and output. * * * , * * and * denote significance levels of 1%, 5% and 10% respectively. call and ln(boj dpst) are tested in (1981q1,1998q4) and (1999q1,2007q4) respectively, while other variables are in (1981q1,2007q4).