Research and Studies

Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2015 > (Research Paper) Is macroprudential policy instrument blunt?

Is macroprudential policy instrument blunt?

December 21, 2015
Katsurako Sonoda*1
Nao Sudo*2

Click on Full Text [PDF 711KB]

Abstract

Since the global financial crisis of 2008, macroprudential instruments have attracted an increasing amount of attention as potentially the best tools for stabilizing boom-and-bust cycles. This is because, in contrast to short-term interest rates, macroprudential instruments are regarded as particularly precise tools that act only on the area of concern. In this paper, we conduct an empirical examination to determine if this is the case by studying relevant areas of the Japanese economy from the 1970s to 1990s. We focus on a policy instrument called Quantitative Restriction (QR) implemented by the government. QR explicitly required banks to curb their lending to the real estate industry and related activities, and was used in the wake of the credit boom. We construct shocks to QR using narrative records of the government, and estimate their impact on the macroeconomy. We find that QR affected the aggregate economy as well as the real estate sector and land prices. In order to see why QR was a "blunt" instrument, we conduct a cross-sectional analysis using individual bank data and disaggregated industry group data. We find evidence that shocks to QR affected the aggregate economy by damaging the balance sheets of banks and non-financial firms.

JEL Classifications
E20, J11

Keywords
short-term interest rates; macroprudential instrument; boom-and-bust cycle

  •   *1 Financial System and Bank Examination Department, Bank of Japan (currently, Ministry of Economy, Trade and Industry)
    E-mail : katsurako.sonoda@boj.or.jp
  •   *2 Financial System and Bank Examination Department, Bank of Japan
    E-mail : nao.sudou@boj.or.jp

Notice

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 Relations Department (post.prd8@boj.or.jp) 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.