THE EFFECTIVENESS OF NONTRADITIONAL MONETARY POLICY: THE CASE OF JAPAN

The effectiveness of nontraditional monetary policy is controversial at least in Japan. Making use of data from the quantitative easing monetary policy period, this paper presents statistical evidence on the effectiveness of nontraditional monetary policy. We empirically demonstrate that quantitative easing monetary policy, adopted by the Bank of Japan for the period from March 2001 to March 2006, had a stimulating effect on investment and production at least through Tobin's q channel. We also provide a simple and operational model in which an injection of base money lowers the interest rate on bonds, reduces the required rate of returns from capital stocks, and depreciates the value of domestic currency.