The Policy Rules To Represent The Recent Monetary Policy Experience Of Japan

In this paper, we investigate policy rules, which can be effectively used under current Japan’s economy conditions, and carry out a first assessment of its recent "Quantitative and Qualitative Monetary Easing"(QQE), which was initially launched by the "Bank of Japan"(BOJ) in April2013. BOJ once determined to implement the so-called "quantitative easing policy" in March2001. The main policy target was the amount of current account balance and the higher amount of "Japanese government bonds"(JGB) that BOJ would purchase outright each month. Even though BOJ actually invented quantitative easing policy, this2013policy no longer goes by the same name. The bank introduced a new label, QQE, for its policy. Their forward guidance under QQE is to purchase an enormous amount of JGB for the quantitative part and to take all long run growth strategy, rather than maintaining an incremental approach, which will lead to achieving the inflation stability target of2percent being qualitative part. The primary channels that this paper focusing on are inflation and exchange rate in Japan. The major reason for this spotlight is that, under Japan’s economic structure and the objective of QQE, monetary policy actions have their effect through both channels. The tool used within this paper is the "Monetary Conditions Index"(MCI), which is defined as weighted average of changes in short-term interest and exchange rate in comparison to their values in a given base period. The idea of the MCI originated from Central Bank of Canada. It was used to measure the degree of ease or tightness in monetary system. In the early1990s, the Bank of Canada, Sweden, Norway, and New Zealand all built the MCI to serve as an indicator of monetary policy stance and operational target as well. This paper constructs the MCI for Japan by using "Vector Autoregression"(VAR) approach in order to see the effect of changes in the interest rate and the exchange rate on GDP. The weight obtained from VAR approach is then used as a coefficient in constructing the MCI for Japan. After the MCI is constructed completely,"Multiple Linear Regression"(MLR) is conducted based on the Taylor rule and the Taylor-type rule. The objective of this study is to compare the capability of both rules to explain recent monetary policy experience of Japan. The paper investigates the question of which policy rule is better in representing the recent monetary policy experience of japan between the Taylor rule and the Taylor-type rule based on MCI index. The issues deserve to be taken into consideration because QQE still has a long path to move on. The finding from this study concerns the question as to whether the Taylor rule or the Taylor-type rule should be used as an estimator for the monetary policy stance of Japan.