Unconventional Monetary Policy and the Bond Market in Japan: A New Keynesian Perspective

Basu, Parantap; Wada, Kenji

Abstract

Using the lens of a medium scale DSGE model, we analyze macroeconomic effects of Japan’s unconventional monetary policy which is known as Qualitative and Quantitative Easing (QQE). Our focus is on the bond market. The model features: (i) commercial bank’s demand for excess reserve in response to liquidity risk and (ii) linkage among central bank, commercial banks and the government via government bonds and bank reserve. We simulate the policy effects of a quantitative easing (QE) shock and a negative shock to the interest rate on excess reserve (IOER). The QE multiplier for real GDP is 1.94 and it has substantial effect on lowering the bond yield in line with the policy target of QQE. On the other hand, an IOER cut has qualitatively similar effects on the real and financial sectors but quantitatively its effect is of second order importance. In light of these policy simulations, we evaluate Japan’s recent yield curve control policy.

Citation

Basu, P., & Wada, K. (2023). Unconventional Monetary Policy and the Bond Market in Japan: A New Keynesian Perspective. Japan and the World Economy, 67, Article 101207. https://doi.org/10.1016/j.japwor.2023.101207

• Journal Article Type: Article
• Acceptance Date: Jul 9, 2023
• Online Publication Date: Jul 26, 2023
• Publication Date: 2023-09
• Deposit Date: Aug 15, 2023
• Publicly Available Date: Jul 27, 2025
• Journal: Japan and the World Economy
• Print ISSN: 0922-1425
• Electronic ISSN: 1879-2006
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 67
• Article Number: 101207
• DOI: https://doi.org/10.1016/j.japwor.2023.101207
• Public URL: https://durham-repository.worktribe.com/output/1717725
• Publisher URL: https://www.sciencedirect.com/journal/japan-and-the-world-economy