Specification and Analysis of a Monetary Policy Rule for Japan

This paper investigates the performance, in several small-scale models of the Japanese economy, of an operational monetary policy rule related to ones previously considered for the United States. The rule dictates settings of the monetary base that are designed to produce values of nominal GNP close to targets that grow smoothly at a noninflationary rate. Simulations with quarterly data for the period 1972-92 yield predominantly favorable results. Experiments with an interest rate instrument are also conducted but the simulated performance is less desirable. One section discusses issues concerning monetary base control in Japan.