Monetary policy of the Bank of Japan—inflation target versus exchange rate target

• Published in: Japan and the world economy Vol. 17; no. 2; pp. 189 - 208
• Main Authors: de Andrade, Joaquim Pinto, Divino, José Angelo
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-04-2005; Elsevier
• Series: Japan and the World Economy
• Subjects: Banks; Cointegration; Exchange rates; Inflation; Japan; Monetary policy; Target inflation; Taylor rule; Unit root; C3; E5; C5; Taylor rule; Cointegration; Monetary policy; J3; Target inflation; Unit root; E3
• ISSN: 0922-1425; 1879-2006
• DOI: 10.1016/j.japwor.2003.12.009

This paper reviews the empirical evidence on the monetary policy of the Bank of Japan (BOJ). The main findings confirm [McKinnon, R., Ohno, K., Dollar and Yen, Resolving Economic Conflict between the United States and Japan. MIT Press, Cambridge, MA, USA, 1997] thesis that the BOJ has tried to stabilize exchange rate. The interest rate is counter-cyclical to the exchange rate and the coefficient of inflation, which is not weakly exogenous, is significantly smaller than 1. Impulse response analysis confirms the BOJ’s sensitivity not only to inflation and output gap but also to exchange rate. Finally, historical decomposition reveals a major role for exchange rate in explaining cyclical patterns of the interest rate, especially during the bubble period.