Do the Bank of Japan’s Unconventional Monetary Policies Decrease Real Interest Rates under a Zero Lower Bound?

Exchange rates are expected to adjust according to the stance of monetary policies, which are in normal times differences in interest rates set by the central banks. This interest rate parity does, however, no longer hold if central banks approach the zero lower bound on interest rates and switch to measures of quantitative easing. Therefore, the author estimates exchange rate changes based on the different stance of the monetary base, which is an indicator of differing monetary policies in the countries. The results reveal that indeed exchange rates movements in the Dollar-Euro-Rate can be explained by differences in the monetary base, since the zero lower bound has become binding. However, the influence depends crucially on whether the monetary base is increased or decreased and whether the other central bank is also expanding or reducing its balance sheet at the same time. Keywords: monetary base, exchange rate, Fed, ECB. JEL Classification: E52, E58, F42

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Identifying and estimating the effects of unconventional monetary policy: How to do it and what have we learned?

Econometrics Journal ◽

10.1093/ectj/utaa020 ◽

2020 ◽

Cited By ~ 1

Author(s):

Barbara Rossi

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Zero Lower Bound ◽

Monetary Policy Shocks ◽

Monetary Policies ◽

Policy Transmission ◽

Policy Shocks ◽

Recent Financial Crisis ◽

Monetary Policy Transmission Mechanism

Summary The recent financial crisis led central banks to lower their interest rates in order to stimulate the economy until they hit the zero lower bound. How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the monetary policy transmission mechanism changed in the zero lower bound era? This article aims to provide an overview of the econometric challenges of and the solutions to the identification of monetary policy shocks in unconventional times as well as a survey of their empirical effects on the economy.

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Low real interest rates and the zero lower bound

Review of Economic Dynamics ◽

10.1016/j.red.2018.12.003 ◽

2019 ◽

Vol 31 ◽

pp. 36-62 ◽

Cited By ~ 4

Author(s):

Stephen D. Williamson

Keyword(s):

Lower Bound ◽

Interest Rates ◽

Zero Lower Bound ◽

Real Interest Rates

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Low Real Interest Rates and the Zero Lower Bound

10.20955/wp.2017.010 ◽

2017 ◽

Vol 2017 (010) ◽

Author(s):

Stephen Williamson ◽

Keyword(s):

Lower Bound ◽

Interest Rates ◽

Zero Lower Bound ◽

Real Interest Rates

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Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

The American Economic Review ◽

10.1257/aer.104.10.3154 ◽

2014 ◽

Vol 104 (10) ◽

pp. 3154-3185 ◽

Cited By ~ 208

Author(s):

Eric T. Swanson ◽

John C. Williams

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Lower Bound ◽

Private Sector ◽

Interest Rates ◽

Zero Lower Bound ◽

Short Term ◽

Macroeconomic Models ◽

Monetary And Fiscal Policy ◽

Effectiveness Of Monetary Policy

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

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