Macroeconomic Effects of Unconventional
Monetary Policy in Japan: Analysis Using
Narrative Sign Restrictions

Abstract:

We evaluate the macroeconomic effects of unconventional monetary policy (UMP) in Japan, focusing in particular on the Quantitative and Qualitative Monetary Easing (QQE) implemented during Governor Haruhiko Kuroda’s tenure. To identify UMP shocks, we impose narrative sign restrictions on structural shocks and on historical decompositions, exploiting three major policy episodes that generated significant surprises in financial markets. Our results indicate that expansionary UMP shocks increase both output and the inflation rate. The exchange rates, stock prices, and bank lending also respond to the UMP shock in a manner consistent with standard macroeconomic theory. Furthermore, narrative sign restrictions resolve some puzzling responses observed with Cholesky decomposition and tighten the wide credible intervals typical of standard sign restrictions.