Testing the effectiveness of unconventional monetary policy in Japan and the United States

TL;DR

This paper empirically tests whether unconventional monetary policy renders the short-term interest rate irrelevant in Japan and the US, finding strong delayed effects but rejecting the irrelevance hypothesis.

Contribution

It develops a theoretical framework and conducts empirical tests showing that UMP does not make the short rate irrelevant, with significant delayed impacts observed.

Findings

Rejection of the irrelevance hypothesis for Japan and the US

Evidence of strong delayed effects of UMP

Short rate remains relevant in empirical models

Abstract

Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop a theoretical model that underpins our empirical test of this `irrelevance hypothesis' based on the simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of monetary policy. We test the hypothesis for Japan and the United States using a structural vector autoregressive model with the ELB. We firmly reject the hypothesis but find that UMP has had strong delayed effects.