In this paper, we explore the effects of the Bank of Japan's (BOJ's) policy commitment under zero interest rates on the economy, by considering the transmission channel of altering private-sector expectations. To that end, we carry out a structural vector autoregression analysis on macroeconomic variables and private-sector expectations variables, using a time-varying parameters estimation technique with stochastic volatility. We show empirical evidence on two points. First, the BOJ's policy commitment regarding the future course of short-term interest rates, associated with only a small reduction in policy interest rates, succeeded in altering private-sector expectations. Second, the BOJ's policy commitment alone, nevertheless, was not sufficient to restore the previous trends in prices and output.
Keywords: Policy commitment; policy duration effect; expectations management; Bayesian estimation; time-varying parameter vector autoregression with stochastic volatility
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.