This paper contributes to the discussion on the functioning of the monetary policy transmission mechanism in Japan during the past three decades. It extends the methodology of time-varying parameter vector autoregressions (TVP-VAR) by employing an identification scheme based on sign restrictions. This approach allows for an explicit account of the zero lower bound on the nominal interest rate. Results suggest differences in the transmission mechanism between the quantitative easing policy period and the periods when the call rate played the role of a monetary policy instrument. Monetary policy operating through call rate movements is found to influence output more than when it targets banks’ balances held at the central bank. Monetary policy operating through quantitative easing is found to influence inflation, in sharp contrast to the previous literature.
Keywords: Structural vector autoregressive model; time-varying parameters; sign restrictions; unconventional monetary policy; zero lower bound
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.