Re-evaluation of Japan's monetary policy in the late 1980s with the interest rate gap

Abstract

This article presents reconsideration of whether the monetary policy in the late 1980s was delayed. No report in the literature describes studies evaluating past monetary policy using the model-consistent latent variable from Bayesian estimation. No delay of monetary policy can be found.

Keywords:

• natural rate of interest
• interest rate gap
• monetary policy
• DSGE model

JEL Classification:

• E4
• E5

Notes

¹ is an expenditure shock.

²The Dynare file is available from the author upon request.

³See An and Schorfheide (2007) for a detailed explanation of Bayesian estimation.

⁴See Hirose and Kurozumi (2012). However, unlike Hirose and Kurozumi, the estimated potential output was not used herein.

⁵From the Fisher equation, the nominal-based natural rate of interest here is equal to the posterior mean of the two-sided smoothed estimate of the natural rate of interest adding the model-based expected inflation .

⁶Figure 1 also shows that the easy monetary policy in the early 1980s used to ride out the recession caused by the second oil crisis in 1979 indicates negative gaps.