Vol.21, No.1 / February 2003

The Effects of Japanese Monetary Policy Shocks on Exchange
Rates: A Structural Vector Error Correction Model Approach

Kyungho Jang and Masao Ogaki

This paper investigates the effects of shocks to Japanese monetary policy on exchange rates and other macroeconomic variables, using structural vector error correction model methods with long-run restrictions. Long-run restrictions are attractive because they are more directly related to economic models than typical recursive short-run restrictions that some variables are not affected contemporaneously by shocks to other variables. In contrast with our earlier study of U.S. monetary policy with long-run restrictions in which the empirical results were more consistent with the standard exchange rate model than those with short-run restrictions, our results for Japanese monetary policy with long-run restrictions are less consistent with the model than those with short-run restrictions.

Key words: Vector error correction model; Impulse response; Monetary policy shock; Cointegration; Identification; Long-run restriction

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