This paper quantifies the policy duration effect of the zero interest rate policy implemented in Japan from February 1999 to August 2000. Our empirical analysis shows that the policy duration effect observed in Japanese financial markets emerged via the expectations channel on the future course of monetary policy actions, supplemented significantly by liquidity effects in the severe financial conditions.This finding leads to the policy implication that the effectiveness of the zero interest rate policy depends crucially on the financial and economic conditions.
Keywords: Zero interest rate policy; Policy duration effect; Liquidity constraint; Forward interest rates
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.