Unconventional Monetary Policy in Japan and USA
Prepared for Econ 4426
This paper outlines the conceptual framework regarding different types of unconventional monetary policy. To develop an understanding of unconventional monetary policy, conventional monetary policy must first be examined. This paper will then explore the situation that Japan applied unconventional monetary policy, and will consider what lessons countries thinking of instituting unconventional can take away from this historical example. Moving on, this paper will look the Federal Reserve’s experience with unconventional monetary policy in the aftermath of the financial crisis of 2007, when short-term interest rates were constrained by the zero-lower-bound. Did they learn from Japan’s experience?
Prior to the great recession of 2007, due to great advances in theoretical studies of monetary economics, it was generally believed by central banks around the world, particularly in OECD developed countries, that monetary policy had become a science. That is to say, in the case of the Federal Reserve, policy makers and academics generally agreed that manipulating the federal funds rate could affect market interest rates in such a way that output could grow at the desired rate, with minimal variance in inflation as and other variables. (Mishkin 2011) Following the recession of 2007, the landscape of monetary policy thought was changed forever. In America, the Federal Reserve found that they were at the zero-lower-bound interest rate, a type of liquidity trap. In this situation, the nominal interest rate is as low as it can possibly be without the real interest rate becoming negative. At this point, central banks can not lower the interest rate any further to stimulate spending, so unconventional monetary policy must be considered. (Mishkin 2011) This paper will first examine the conventional implementation of monetary policy used in in America, by the Federal Reserve. Secondly, this paper will closely examine the following three main types of unconventional monetary policy: 1) Signaling
2) Quantitative easing
3) Credit easing
Moving on, this paper will explore the use of unconventional monetary before the recession, specifically in Japan from 2000-2006. The main focus of this section will be to derive lessons from Japan’s experience with quantitative easing. The following questions will be addressed: 1) Were the desired results achieved?
2) Why/why not?
3) If not, what changes can be made in the future to yield more desirable results? Finally, this paper will look specifically at the Federal Reserve’s implementation of these types of unconventional monetary policy following the great recession, where applicable. Through the analysis of announcements made by the FED, and the consideration of the empirical evidence, this paper will attempt to make conclusions regarding the medium run effects of unconventional monetary policy, and potential causes for successes and failures. 2. Monetary Policy in America Before the Great Recession
The Federal Reserve targets both prices and employment levels in what is described on their website as a duel mandate. The Federal Reserve’s regime is described as an implicit nominal anchor. Mishkin et al. (2005) state that there are both advantages and disadvantages to this approach. Of particular interest for the topic of unconventional monetary policy, they state that under an implicit nominal anchor, there is a lack of transparency and accountability on behalf of the central bank, which could lead to an unnecessarily large amount of volatility in the financial markets.
This drawback to the FED’s traditional system of monetary policy was necessary to address before they could consider implementing unconventional monetary policy. We will see later that indiscriminant transparency is imperative for unconventional monetary policy. (Mishkin 2011) 3. Exploring...
Bibliography: Bernanke. Federal Reserve, "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment." Last modified 2004. Accessed March 25, 2013. http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2004_2_bpea_papers/2004b_bpea_bernanke.pdf.
Bernanke, . Federal Reserve, "At the Stamp Lecture, London School of Economics, London, England." Last modified 2009. Accessed March 25, 2013. http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm.
Berkmen, . International Monetary Fund, "Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective? ." Last modified 2012. Accessed March 25, 2013
Labonte, . Congressional Research Service , "Federal Reserve: Unconventional Monetary Policy Options." Last modified 2013. Accessed March 25, 2013. http://www.fas.org/sgp/crs/misc/R42962.pdf.
Mishkin, . National Bureau of Economic Research, "Monetary Policy Strategy: Lessons from the Crisis." Last modified 2011. Accessed March 25, 2013. http://www.nber.org/papers/w16755.pdf.
Shirakawa, . Bank of Japan, "Masaaki Shirakawa: Unconventional monetary policy – central banks: facing the challenges and learning the lessons ." Last modified 2009. http://www.bis.org/review/r090819a.pdf.
Williams, John C., “Presentation to the Center for Economics and Public Policy” Speech, Irvine, California, November 5 2012. UC Irvine
Please join StudyMode to read the full document