The Effects of Monetary Policy Commitment: Evidence from Time- varying Parameter VAR Analysis

In this paper, we explore the effects of the Bank of Japan's ( BOJ's) policy commitment under zero interest rates on the economy, by considering the transmission channel of altering private-sector expectations. To that end, we carry out a structural vector autoregression analysis on macroeconomic variables and private-sector expectations variables, using a time-varying parameters estimation technique with stochastic volatility. We show empirical evidence on two points. First, the BOJ's policy commitment regarding the future course of short-term interest rates, associated with only a small reduction in policy interest rates, succeeded in altering private-sector expectations. Second, the BOJ's policy commitment alone, nevertheless, was not sufficient to restore the previous trends in prices and output.