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Regime-Switching Approach to Monetary Policy Effects: Empirical Studies using a Smooth Transition Vector Autoregressive Model 1,2

August 2003
Munehisa Kasuya

Views expressed in Working Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or Research and Statistics Department.

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Even though monetary policy has kept interest rates at historically low levels, the Japanese economy has experienced long lasting recessions since the 1990s. These recessions are commonly attributed to nominal interest rates coming up against the zero bound and to the delay in achieving necessary structural changes.
However, since these two factors had not yet appeared in the early 1990s, there must also have been other factors acting to weaken the effectiveness of monetary policy. In this paper, we employ Japanese data to conduct an empirical analysis of changes in the effect of monetary policy on the real economy. We find that monetary policy effects vary depending on the phase of the business cycle (measured in terms of the rate of change in real output) and the lending attitudes DI. More precisely, policy effects are larger in recession but diminish in extreme recession, and monetary policy is more effective when lenders' attitudes are severe but less effective when they are excessively severe.

Key Words:
monetary policy, policy effect, financial accelerator, nonlinearity, smooth transition model, multiple regime switching

JEL classification:
E52, E32

  1. The authors would like to thank Yasushi1 Iwamoto, Tsunao Okumura, Shin-ichi Kitasaka, Makoto Saito, Etsuro Shioji, Shinichi Fukuda, Kaoru Hosono, Youhei Takeda, Toshiaki Watanabe, participants of the 2002 Conference by Institute of Statistical Research, and many staff at the Bank of Japan for helpful suggestions and comments. We would also like to thank Ichiro Fukunaga, Emi Arinaga(Shimizu), Sumie Yoshida, Sayaka Sasaki for their research assistance. Views expressed in this paper are the authors' and do not necessarily reflect those of Bank of Japan or the Research and Statistics Department.
  2. The Japanese version of the Working Paper 03-7 includes Ichiro Fukunaga's tentative theoretical work as an appendix.