Was Quantitative Easing Policy Effective?

MIHIRA, Tsuyoshi (Toyo University)YAMASAWA, Nariyasu (Atomi University)SEITANI, Haruki (Economic and Social Research Institute)SAITO, Jun (Economic and Social Research Institute)

New Monetary Policy Framework(Introduced March 2001)

(i) Shift to Quantitative TargetCall Rate Current Account Balance

(ii) Duration CommitmentContinue QEP until CPI Inflation Rate Be Stably Positive

(iii) Increase in JGB Purchase Operation

Interest Rate Target Policy

Quantitative Easing Policy

A Macroeconomic Model with ‘Excess Money’

Macroeconomic Model

Excess Money

Changes in Excess Money

Estimation Results of Macroeconomic Model

Effect of QEP on GDP Growth

Transmission Mechanisms of QEP

New Monetary Policy Framework

(1) Interest Rate Effect (2) Expectation Effect - Commitment Effect - Time-lag Effect - Signaling Effect (3) Portfolio Rebalancing Effect - Induced by Increase in CAB Target - Induced by Increase in BOJ’s JGB purchase

Attainable by Zero Interest Rate Policy as well

Effects Unique to Quantitative Easing …Focus of this paper

Examination of Expectation EffectModel

Estimation Equation

Changes in Implied Forward Rates

Results on Expectation Effect(JGB IFR; QE = CAB)

(Notes) Dum = QEP Period DummyVariations of estimations are found on Tables 4-1 and 4-2

cf. Commitment Effect

(Note) Dum2 = Dummy for periods with monetary policy commitmentFull estimation results are on Table 4-3

Banks’ Loan Supply Function

(Note) Variations of estimations are found on Table 5-1

Bank’s Bond Investment Function

(Note) Variations of estimations are found on Tables 5-2

A CAPM-based FrameworkCAPM

Estimation Model

Changes in QEP Measurements

Portfolio Rebalance Effect on EquitiesDependent Variable:Excess Return on Equity = E(rt

NKY-rtf) = E(lnPt+22

NKY-lnPtNKY)- rt

f

(Note) Results for volatility equation are on Table 6-1Results for different sample period are on Table 6-2

(Level Estimation)

(Differenced Estimation)

Estimation 1 Estimation 3IV_NKY 7.3330 (6.905)*** 5.5348 (5.818)***lnBOJ_JGB 5.5981 (5.274)***lnBOJ_CA 1.4200 (6.243)***J-test [p-value] 58.912 [0.000] 66.275 [0.000]

Estimation 2 Estimation 4IV_NKY 5.2387 (5.651)*** 4.6558 (5.098)***DlnBOJ_JGB -0.1133 (-0.215) DlnBOJ_CA 0.1071 (0.650) J-test [p-value] 64.755 [0.000] 72.498 [0.000]

Portfolio Rebalance Effect on JGBDependent Variable:Excess Return on JGB = E(rt

JGB-rtf) = E(lnPt+22

JGB-lnPtJGB)- rt

f

(Note) Results for volatility equation are on Table 6-3Results for different sample period are on Table 6-4

(Level Estimation)

(Differenced Estimation)

Estimation 1 Estimation 3IV_JGB 6.9526 (7.619)*** 9.0787 (8.254)***lnBOJ_JGB 0.0446 (0.435) lnBOJ_CA 0.0010 (0.036) J-test [p-value] 56.313 [0.000] 45.675 [0.000]

Estimation 2 Estimation 4IV_JGB 8.5247 (8.339)*** 8.7362 (7.816)***DlnBOJ_JGB 0.2769 (3.213)***DlnBOJ_CA -0.0293 (-0.748) J-test [p-value] 53.091 [0.000] 45.733 [0.000]

Portfolio Rebalance Effect on Corporate Bonds

Aa A1-year 3-year 5-year 1-year 3-year 5-year

HV-1 0.1157 0.9193 0.0503 -0.0888 0.1074 -0.0329 (0.2534) (1.6153) (0.1908) (-0.0799) (0.3428) (-0.0777)

lnBOJ_JGB -0.0014*** 0.0036*** -0.0008*** -0.0038*** -0.0039*** -0.0051***(-14.0714) (6.4882) (-3.9437) (-11.9041) (-16.9191) (-23.1366)

Adj.R-sq 0.250 -2.053 0.114 0.322 0.339 0.476J-test 36.251 34.590 62.915 28.180 41.336 27.981[p-value] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]

Baa Ba1-year 3-year 5-year 1-year 3-year 5-year

HV-1 1.1453 3.8444*** 2.5145** 2.3642*** 4.2286*** 2.2828***(0.6307) (4.6703) (2.5687) (2.8441) (3.3135) (3.7632)

lnBOJ_JGB -0.0061*** -0.0032*** -0.0061*** -0.0274*** -0.0228*** -0.0316***(-10.9857) (-6.3372) (-6.9651) (-9.8555) (-7.1026) (-9.3848)

Adj.R-sq 0.254 -0.069 0.097 0.199 0.070 0.098J-test 32.455 53.006 41.077 33.405 47.109 40.654[p-value] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]

Dependent Variable:Excess Return on Corporate Bonds = ri,t

Bond-rtJGB

(Note) Results for QE=BOJ_CA are on Table 6-5; Results for volatility equation are on Table 6-5

Portfolio Rebalance Effect on Bank Loans

(Level Estimation)

(Differenced Estimation)

Dependent Variable:Excess Return on Bank Loans = rt

Loan-rtJGB

Default +6 5.3641* (1.850) 2.1760** (2.109) 6.1508* (1.799)lnJGB_OPE 0.0218** (1.987)lnBOJ_JGB 0.0076*** (3.325)lnBOJ_CA 0.0056** (2.130)Sample 1996M9-2006M1 1995M3-2006M1 1995M3-2006M1J-test [P-Value] 2.048 [0.915] 5.775 [0.449] 1.673 [0.947]

Default +6 -0.3464 (-0.085) -3.5236 (-0.279) -0.0488 (-0.006)lnJGB_OPE -0.1655*** (-4.522)lnBOJ_JGB -0.0358*** (-3.060)lnBOJ_CA 0.0220* (1.697)

1996M10-2006M1 1995M4-2006M1 1995M4-2006M1J-test [P-Value] 13.163 [0.041] 5.373 [0.497] 5.856 [0.439]

Some Problems in Estimation

Sensitivity to sample periods

Spurious regressionNon-stationarityMissing variable bias

Over-identification test

Summary of Examination on QEP

I. Macroeconomic Effect……………….……………. Effective

II. Transmission Mechanisms (1) Interest Rate Effect……………………………. Not Unique to QEP (2) Expectation Effect - Commitment Effect…………………………… Effective, but not Unique to QEP - Time-lag/Signaling Effect…………………….. No Effect Found (3) Portfolio Rebalancing Effect - Induced by Increase in CAB Target…………... No Effect Found - Induced by Increase in BOJ’s JGB purchase…. No Certain Results