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Output Composition of the Monetary Policy Transmission Mechanism in Japan*1

November 2003
Ippei Fujiwara *2

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  • *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:


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.

JEL Classification:
C33; E50

Key words:
VAR; DSGE; Monetary Policy Transmission; Output Composition Puzzle