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Identifying Conventional and Unconventional Monetary Policy Shocks

: A Latent Threshold Approach

May 2, 2013
Takeshi Kimura*1
Jouchi Nakajima*2

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This paper proposes a new estimation framework for identifying monetary policy shocks in both conventional and unconventional policy regimes using a structural VAR model. Exploiting a latent threshold modeling strategy that induces time-varying shrinkage of the parameters, we explore a recursive identification switching with a time-varying overidentification for the interest rate zero lower bound. We empirically analyze Japan's monetary policy to illustrate the proposed approach for modeling regime-switching between conventional and unconventional monetary policy periods, and find that the proposed model is preferred over a nested standard time-varying parameter VAR model. The estimation results show that increasing bank reserves lowers long-term interest rates in the unconventional policy periods, and that the impulse responses of inflation and the output gap to a bank reserve shock appear to be positive but highly uncertain.

JEL Classifications
C32; E52

Identification; Latent threshold models; Monetary policy; Time-varying parameter VAR; Zero lower bound

We are grateful for helpful discussions with and comments from Kosuke Aoki, Hiroshi Fujiki, Michael Funke, Takuji Kawamoto, and Mike West, as well as seminar participants at the Bank of Japan, University of Tokyo, and Hitotsubashi University. The views expressed herein are those of the authors alone and do not necessarily reflect those of the Bank of Japan.

  •   *1 Monetary Affairs Department
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  •   *2 Monetary Affairs Department
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