Output Composition of the Monetary Policy Transmission Mechanism in Japan*1
Ippei Fujiwara *2
Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact each author.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Information Division of the Public Relations Department (email@example.com) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.
Click on wp03e09.pdf (428KB) to download the full text.
- *1 The author would like to thank Ed Nelson (FRB St.Louis) for sharing the code for the DSGE model used to evaluate the VAR impulse responses. Helpful comments were also received from Kosuke Aoki (Universitat Pompeu Fabra), Kanemi Ban (Osaka University), Shigeru Fujita (University of California, San Diego), Munehisa Kasuya (Bank of Japan), Ryo Kato (Bank of Japan), Ryuzo Miyao (Kobe University), Kazuo Momma (Bank of Japan), Toshitaka Sekine (Bank of Japan) and seminar participants at Osaka University and the Bank of Japan. Importantly, the views expressed in this paper should not be taken to those of the Bank of Japan nor any of its respective monetary policy or other decision making bodies. Any errors remain soley the responsibilibily of the author.
- *2 Research and Statistics Department, e-mail: firstname.lastname@example.org
In this paper, I investigate the output composition of the monetary policy transmission mechanism in Japan. The predominant channel via which monetary policy affects output in Japan is usually thought to be the investment channel, namely the process whereby a change in the interest rate alters the cost of capital and therefore investment. In the United States, however, the consumption channel, which works through intertemporal substitution, is commonly considered the more significant of the two.
The aim of this paper is twofold: 1) based on analysis using VAR and DSGE models, to understand which of the two channels; the consumption channel or the investment channel, plays the more important role in the transmission of Japanese monetary policy; and 2) to contribute to the research on what Angeloni, Kashyap, Mojon and Terlizzese (2003) term the "Output Composition Puzzle," referring to the fact that whereas in the United States the predominant driver of output changes is the consumption channel, in the Euro area it is the investment channel.
The results obtained from the Japanese models are consistent with our intuition that the investment channel is more important.
VAR; DSGE; Monetary Policy Transmission; Output Composition Puzzle