An Injection of Base Money at Zero Interest Rates: Empirical Evidence from the Japanese Experience 2001-2006*

Abstract

Many macroeconomists and policymakers have debated the effectiveness of further injection of base money at zero short-term interest rates. This paper takes up the Japanese experience of the quantitative monetary-easing policy (QMEP) that was conducted in 2001—2006. In particular we measure the effect of the QMEP on aggregate output and prices, and examine its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.

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