Which type of monetary policy rule best describes the policy conducted by the Bank of Japan (BOJ) during the period when the nominal interest rate is constrained at the zero lower bound (ZLB)? What are the economic fundamentals that explain Japan's prolonged stagnation? How important is incorporating nonlinearities in the analysis? We answer these questions by estimating a small-scale nonlinear dynamic stochastic general equilibrium (DSGE) model. We find that: the BOJ conducted a threshold-based forward guidance policy; adverse demand shocks explain Japan's experience; and nonlinear models are very useful in the analysis of the Japanese economy during the ZLB period.

Standard New Keynesian models have often neglected temporary sales. In this study, we ask whether this treatment is appropriate. We use Japanese scanner data covering the last two decades and find a negative correlation between the frequency of sales and hours worked. We then construct a model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. We show that the decline in hours worked explains the rise in the frequency of sales. The real effect of monetary policy shocks weakens by around 40% due to temporary sales, but monetary policy still matters.

This study considers the macroeconomic effects of retailer market concentration and buyer-size discounts on inflation dynamics. During Japan's “lost decades”, large retailers enhanced their market power, thus increasing the exploitation of buyer-size discounts in the procurement of goods. We incorporate this effect into an otherwise standard New Keynesian model. Calibrating to the Japanese economy during the lost decades, we find that these developments led to a deflation of approximately 0.1% annually.

Sufficiently high net worth of financial intermediaries (FIs) is considered a necessary condition for financial and macroeconomic stability. In this paper, we explore why the net worth of FIs is important as compared to that of nonfinancial firms using a dynamic general equilibrium model, in which both FIs and nonfinancial firms rely on costly external debt. We find that an exogenous disruption of the FIs' net worth has a greater aggregate impact than does the same-sized disruption of the nonfinancial firms' net worth. The key reason is that the net worth of the FIs in the United States is small. (JEL E22, E44, G21)

In this paper, we explore the role of financial intermediation malfunction in macroeconomic fluctuations in Japan. To this end we estimate, using Japanese data, a financial accelerator model in which the balance sheet conditions of entrepreneurs in a goods-producing sector and those of a financial intermediary affect macroeconomic activity. We find that shocks to the balance sheets of the two sectors have been quantitatively playing important role in macroeconomic fluctuations by affecting lending rates and aggregate investments. Their impacts are prominent in particular during financial crises. Shocks to the entrepreneurs' balance sheets have played a key role in lowering investment in the bubble burst during the early 1990s and in the global financial crisis during the late 2000s. Shocks to the financial intermediaries' balance sheets have persistently lowered investment throughout the 1990s. (C) 2016 Published by Elsevier B.V.

The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap? RIM, Japan; Keio University, Japan; Australian National University, Australia; Yokohama City University, Japan; Waseda University, Japan. (C) 2015 Elsevier Inc. All rights reserved.

Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This article examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is late.(JEL D82, E58, G18)

We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the US scanner data. Second, regular prices are almost as flexible as those in the USA and Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable and maintained throughout the sample period. Fourth, during Japan's lost decades, temporary sales have played an increasingly important role in households' consumption expenditure. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment, in particular indicators associated with a labor market, while other components of price changes are not.

We consider the fiscal multiplier and spillover-the extent to which one country's government expenditure increases production at home and also in another foreign country, when the two countries are caught simultaneously in a liquidity trap. Using a standard new open economy macroeconomics (NOEM) model, we show that the fiscal multiplier and spillover are contrary to textbook economics. For the country where government expenditure takes place, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one, and positive if it is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is critical in understanding the effects of fiscal policy in open economies. These results remain unchanged even if we incorporate incomplete markets or endogenous capital into the model, but local currency pricing yields positive fiscal spillover irrespective of the size of the intertemporal elasticity of substitution. (C) 2013 Elsevier B.V. All rights reserved.

We evaluate the implications of spread-adjusted Taylor rules and capital injection policies in response to adverse shocks to the economy, using a variant of the financial accelerator model. Our model comprises the two credit-constrained sectors that raise external finance under credit market imperfection: financial intermediaries (FIs) and entrepreneurs. With the model estimated using the U. S. data, we find that a spread-adjusted Taylor rule mitigates (amplifies) the impact of adverse shocks when the shock is accompanied by a widening (shrinking) of the corresponding spread. We formalize a capital injection policy as a positive (negative) amount of injection to either of the two sectors in response to an adverse shock (a favorable shock). In contrast to a spread-adjusted Taylor rule, a positive injection boosts the economy regardless of the type of shock. The capital injection to the FIs has a greater impact on the economy compared with that to the entrepreneurs. Our result shows support for adopting the spread-adjusted Taylor rules and capital injections, although welfare implication varies depending on the source of economic downturn and excessive responses aggravate welfare.

The Bank of Japan conducted its quantitative easing policy (QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the 0% threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations. © 2013 Elsevier B.V.

This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis. (C) 2011 Elsevier B.V. All rights reserved.

The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17% of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36% of the variations. (C) 2011 Elsevier B.V. All rights reserved.

Ueda, Kozo-Determinants of households' inflation expectations in Japan and the United States
Using a VAR model that includes survey data on households' inflation expectations for Japan and the US, we investigate their determinants and influences on the economy and compare their properties in two countries. Short-term non-recursive restrictions are imposed taking account of simultaneous co-dependence between realized and expected inflation. We find that responding to changes in exogenous prices and to monetary policy shocks, inflation expectations adjust more quickly than does realized inflation. Compared with Japan, the effects of exogenous prices on inflation and inflation expectations in the US are not only large but also long lasting and shocks to expectations have self-fulfilling effects on inflation. J.Japanese Int. Economies 24 (4) (2010) 503-518. Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1 Nihonbashi-Hongokucho, Chuo-ku, Tokyo, Japan. (C) 2010 Elsevier Inc. All rights reserved.

In this paper, we construct a simple model for communication between a central bank and money-market traders. It is demonstrated that there are multiple equilibria. In one equilibrium, traders truthfully reveal their own information, and by learning this, the central bank can make better forecasts. Another equilibrium is a "dog-chasing-its-tail" equilibrium described by Blinder (1998). Traders mimic the central bank's forecast, so the central bank simply observes its own forecast from traders. The latter equilibrium is socially worse, as inflation variability becomes larger. As policy implications, we find that too-high transparency of central banks is bad because it yields the "dog-chasing-its-tail" equilibrium, and central banks should conduct continuous monitoring or emphasize that their forecasts are conditional because doing so eliminates the "dog-chasing-its-tail" equilibrium. We also consider the possibility of the existence of an optimal degree of transparency.

We estimate a medium-scale dynamic stochastic general equilibrium model of the Japanese economy following Christiano et al. [Christiano, L., Eichenbaum, M., Evans, C., 2005. Nominal rigidities and the dynamic effects of a shock to monetary policy. J. Polit. Economy 113 (1), 1-45]. By using actual capital utilization data and modifying the formulation of utilization following Greenwood et al. [Greenwood, J., Hercowitz, Z., Huffmann, G.W., 1988. Investment, capacity utilization, and the real business cycle. Amer. Econ. Rev. 78 (3), 402-417], this paper Succeeds in incorporating a negative correlation between capital utilization and rental costs to explain actual capital utilization rates. We find that an investment adjustment cost shock is as important as a productivity shock that affects business cycles. We also find hump-shaped and persistent behavior of inflation rates in response to a monetary policy shock, which Christiano et al. cast doubt upon. J Japanese Int. Economies 22 (4) (2008) 476-502. Monetary Affairs Department, Bank of Japan, Japan. (C) 2008 Elsevier Inc. All rights reserved.

This paper demonstrates that, even in the presence of a zero lower bound on nominal interest rates, central banks can eliminate a deflationary trap by the conduct of interest rate rules that have superinertia. (C) 2007 Elsevier B.V. All rights reserved.