The effects of zero interest rate commitment in Japan

Abstract

This article examines the effectiveness of the Bank of Japan's Zero Interest Rate Commitment Policy (ZIRCP). Using the Exponential Autoregressive Conditional Heteroskedasticity model, we present an empirical analysis of the volatility of return on Japanese interest rates for the short-, medium-, long- and super long-term. We find that each interest rate is affected by the ZIRCP. However, the ZIRCP stabilizes the daily change for only the super long-term interest rate. This suggests that the ZIRCP effect includes the decrease in interest rate and the reduction in super long-term variability.

Acknowledgements

I am grateful for constructive comments and suggestions by Toshiki Jinushi. I thank Ryuzo Miyao, Shigeyuki Hamori, the editor and two anonymous referees. I acknowledge financial support from the Osaka Bankers Association.

Notes

¹ BOJ has implemented the Quantitative Easing Policy (QEP) from March 2001 to March 2006. Ugai (2006) introduces the survey of the low interest rate policy in detail.

² Nagayasu (2002) investigates the relationship between inflation and interest rates.

³ The Autoregressive Conditional Heteroskedasticity (ARCH) model is discovered by Engle (1982) and is extended by Bollerslev (1986). See Bollerslev et al. (1992, 1994).