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