Monetary Policy Under the Zero Interest Rate Constraint and Balance Sheet Adjustment

There are two contrasting evaluations of the conduct of Japan's monetary policy since the early 1990s. One is that monetary policy has not been easy enough to promote economic recovery in Japan. The other is that since monetary policy has already been substantially eased, further easing would not contribute to economic recovery, but would rather delay the progress of structural reform that is a prerequisite for sustainable economic growth. With these evaluations in mind, this paper examines the effect of monetary policy in general and the effect of so-called 'quantitative easing' in particular when nominal short-term interest rates are zero and balance sheet adjustment is in progress.