Recherche FFJ Research Statement Tatsuyoshi Okimoto

Tatsuyoshi Okimoto

Empirical Assessment of Unconventional Monetary Policies


Objective and Background

The use of unconventional monetary policies – that is, policies by central banks to pursue further monetary easing by using unconventional instruments such as large-scale asset purchases once conventional policy rates had been lowered to virtually zero percent – has become a common practice among major central banks. For example, the Bank of Japan (BOJ) established the quantitative easing policy in March 2001, which changed the policy targets from the non-collateral call rate to the BOJ's Current Account Balances, significantly increasing the monetary base. Although the policy was terminated in March 2006, BOJ started the comprehensive easing with an asset purchase program in October 2010, under which BOJ purchases various kind of risky assets, such as Exchange Traded Funds (ETF), Japanese Real Estate Investment Trust (J-REIT), and corporate bonds. Moreover, BOJ introduced the quantitative and qualitative easing (QQE) policy in April 2013 along with the 2% inflation target and modified the QQE by adopting negative interest rates and yield curve control in 2016.

On the other hand, other major monetary authorities, such as Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BOE) have also conducted aggressive unconventional monetary policies since the outbreak of the global financial crisis triggered by the collapse of Lehman Brothers in 2008. For instance, the Fed undertook the Large Scale Asset Purchases (LSAPs) starting in December 2008 and expanded or modified the program several times thereafter. Partly because of these LSAPs, the US economy experienced not only a quick recovery but also solid growth, forcing the Fed to consider tapering the LSAPs. As a consequence, the Fed ended the LSAPs in December 2014 and started raising the federal funds (FF) rates in December 2015 to normalize its monetary policy.

Even though unconventional monetary policies have been widely employed, whether they have significant effects on the macroeconomy, such as the real economic activity and inflation, and financial markets remains a matter of debate. Critics tend to argue that such policies have meaningful effects only when financial markets are under severe stress. Put differently, the effects or “returns” of these measures, they contend, diminish as the economy and financial markets return to more or less normal conditions. In addition, evidence on the overall macroeconomic effects is relatively limited and more comprehensive analyses are necessary.

The main goal of the project is to examine the effects of unconventional monetary policies on the financial markets in Japan and other countries by taking the structural changes in the effects of monetary policies and the spillovers to the world economy into consideration. More specifically, the project tries to quantify the effects of BOJ’s unconventional monetary policy shocks measured by the monetary base shocks on the Japanese and global economy as well as international financial markets. In addition, the project also tries to assess the similar impacts of other major central banks’ unconventional monetary policies on the global economy and international financial markets.

Research Methodology

In order to assess the effects of unconventional monetary policies on the international financial markets, it is extremely important to consider the interdependence within the world economy, since world economies, especially the international financial markets, have been integrated considerably over the past two decades. For example, Christoffersen et al. (2012) examine interdependence in international stock markets and find a significant increasing trend in the interdependence for both developed and emerging markets. Similarly, Okimoto (2014) documents asymmetric increasing trends in dependence in major international equity markets. Thus, when we analyze the effects of unconventional monetary policies on the international financial markets, it is very important to consider the spillover effects from one country's monetary policy to the economy and financial markets in other countries. To this end, the project will use Global Vector Autoregression (GVAR) models developed by Pesaran, Schuermann, and Weiner (2004).

The GVAR model is configured by a system of country-specific VAR models, each of which is connected through the so-called “foreign” variables that are defined as a deterministic function of the other country’s domestic variables. Because of this structure, the GVAR models incorporate the transmission mechanism from domestic variables to foreign variables and vice versa, which becomes crucial to conduct the economic analysis including policy effect evaluation. As a consequence, the GVAR models have been applied to several studies analyzing monetary policy effects. For example, Georgiadis (2016) assesses the global spillovers of US traditional monetary policy shocks and finds considerable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. Chen, Filardo, He, and Zhu (2016) study the US unconventional monetary policy effects on reductions in the US term and corporate spreads and its spillover effects on emerging and advanced economies, showing that the estimated effects are sizable and vary across economies. Dekle and Hamada (2015) and Ganelli and Tawk (2017) document the positive and significant impacts of the BOJ's monetary policy shocks on Asian economies. Finally, Chen, Lombardi, Ross, and Zhu (2017) analyze the effects of US and EU unconventional monetary policies on 24 economies and confirm that US unconventional monetary policies generally have stronger domestic and cross-border impacts on output growth and inflation than Euro-area nonstandard measures.

To examine the effects of unconventional monetary policies, how to measure and identify a monetary policy shock are important issues. For the monetary policy measure, the project will use the size of balance sheet measured by the monetary base for all countries. Although each central bank adopts different policy instruments, the size of balance sheet is arguably the primary tool for the all major central banks. Then the project calculates the generalized impulse responses to a monetary base shock to avoid the identification problem. In addition, the project will also try to apply the sign restrictions to identify a monetary policy shock, if time permits.

Capturing the changes in the monetary policy framework is also crucial to assess the impacts of the monetary policies. As we briefly discussed above, the BOJ's unconventional monetary policies evolved significantly since the introduction of QE in 2001. In addition, the Fed introduced its LSAP in December 2008 after the Lehman crisis with several modifications. Furthermore, the Fed started the monetary policy normalization with tapering its balance sheet and raising its policy rate since around 2014, giving a solid reason to assume a regime change. By incorporating the state-dependent or time-varying policy impacts with regime switching models, such as Markov switching models and smooth transition models, we can seek possible answers for many interesting questions. Those examples include whether the BOJ’s monetary policy has become more effective since the introduction to the QQE and whether the Fed’s unconventional monetary policies have different impacts on the financial markets before and after the US monetary policy normalization.

Contribution and Expected Results

This project will try to make a contribution to the literature by extending the previous studies into several directions. First, this project will compare the effects of unconventional monetary policies among several major central banks, including the BOJ, Fed, ECB, and BOE. The BOJ, Fed, and BOE used quantitative easing as the main tool for their unconventional monetary policies, while the ECB was the first one among three to introduce the negative interest rate policy. In addition, the Fed has started unwinding the unconventional monetary policies with increasing policy rates since the end of 2015. Thus, each central bank employed different unconventional monetary policies with different timing. Therefore, it would be instructive to make a comparison to obtain important policy implications for each central bank. Secondly, the project will provide a comprehensive analysis of the effects of unconventional monetary policies on the financial markets, including the equity, government bond, and corporate bond markets. By focusing on the financial markets, the project will be able to use not only monthly data, but also higher frequency data, allowing to conduct more detailed analysis with sufficient estimation accuracy. This could be very important, as this allows us to examine the potential time-varying effects, which is one of the advantages of our project, as we discuss next. Finally and most importantly, the project will accommodate the possible regime changes to take monetary policy regime shifts and promotion of world economic integration into account. To our best knowledge, there are few studies that consider the state-dependent or time-varying effects of unconventional monetary policies. Therefore, this project is expected to gain new insights with taking evolutions in monetary policies and developments of world economic relationship into consideration. Thus, the project will be able to provide instructive policy and practical implications for many countries including Japan.


Chen, Q., A. Filardo, D. He, and F. Zhu (2016), Financial crisis, US unconventional monetary policy and international spillovers, Journal of International Money and Finance 67, 62-81.

Chen, Q., M.J. Lombardi, A. Ross, F. Zhu (2017), “Global Impact of US and Euro Area Unconventional Monetary Policies: A Comparison,” BIS Working Paper 610.

Christoffersen, P., V. Errunza, K. Jacobs and H. Langlois (2012), “Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach,” Review of Financial Studies 25(12), 3711-3751.

Dekle, R., and K. Hamada (2015), “Japanese Monetary Policy and International Spillovers,” Journal of International Money and Finance 52, 175–199.

Ganelli G., and N. Tawk (2017), “Spillovers from Japan's Unconventional Monetary Policy: A Global VAR Approach,” forthcoming in Economic Modelling.

Georgiadis, G. (2016), “Determinants of Global Spillovers from US Monetary Policy,” Journal of International Money and Finance 67, 41–61.

Okimoto, T. (2014), “Asymmetric Increasing Trends in Dependence in International Equity Markets,” Journal of Banking and Finance 46, 219-232.

Pesaran, M.H., T. Schuermann, and S.M. Weiner (2004), “Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model,” Journal of Business and Economic Statistics 22, 129–162.