This paper reviews the issues that researchers encounter when specifying "reaction functions" to represent monetary-policy behavior in an empirical model. These issues arise not only for Japanese monetary policy, but for the behavior of any national monetary authority. The paper suggests a general approach, and then illustrates the ideas by developing reaction functions for the two main instruments of Japanese domestic monetary policy (the interbank call rate and the Bank of Japan's discount rate). As background for its main sections, the paper also gives an overview of how the Bank of Japan implements monetary policy in actual practice.
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.