Research

[1]Quantifying Stock and Flow Effects of QE

In this paper, we focus on the transmission mechanism of QE policy and address which matters most: the size of the bond purchases in each period (flow effects) or the total amount of bonds taken away from the private sectors (stock effects). To this end, we estimate a DSGE model in which short- and long-term bonds are imperfect substitutes due to market segmentation and preferred habitats, using Japan’s data from the 1980s to 2017. We find that (i) Japan’s data support imperfect substitutability between short- and long-term bonds, which implies that government bond purchases by the Bank of Japan (BOJ) reduce the term premium, exerting an expansionary effect on economic activity and prices; (ii) government bond purchases by the BOJ have compressed the 10-year yields by 50–100 basis points as of the end of 2017; and (iii) the compression of the term premium has been mainly driven by stock effects, which underscores the importance of the size of the BOJ’s government bond holdings in determining the term premium.

Earlier version circulated as “Do Market Segmentation and Preferred Habitat Theories Hold in Japan? Quantifying Stock and Flow Effects of Bond Purchases.” [Japanese translation]

[2]The Power of Quantitative Easing Revisited

I theoretically investigate the macroeconomic impact of quantitative easing (QE) using a heterogeneous-agent New Keynesian (HANK) model which incorporates the preferred habitat theory. In contrast to existing studies, my simulation supposes a more realistic situation in which the central bank announces the future asset purchase strategy in advance. I find that if the announcement effect is also considered, the power of QE is weaker in the HANK model than in the representative-agent model. Furthermore, excessive extension of QE has a contractionary effect on the economy. Precautionary saving due to idiosyncratic income risk and redistribution resulting from low long-term yield play a key role in these results.

[3]Firms’ Inflation Expectations under Rational Inattention and Sticky Information: An Analysis with a Small-Scale Macroeconomic Model

In this paper, we construct a small-scale macroeconomic model that incorporates three hypotheses on the formation of inflation expectations: the full-information rational expectations (FIRE), rational inattention, and sticky information hypotheses. Using data for Japan, including survey data on firms’ inflation expectations, we estimate the model to examine the empirical validity of each hypothesis, and analyze how rational inattention and sticky information affect the dynamics of firms’ inflation expectations. Our main findings are twofold. First, each one of the three hypotheses has a role to play in explaining the mechanism of the formation of firms’ inflation expectations in Japan. In this sense, the manner in which firms form their inflation expectations in Japan is complex. Second, although firms’ inflation expectations have been pushed up by the Bank of Japan’s introduction of its “price stability target” and the expansion in the output gap amid the Bank’s Quantitative and Qualitative Monetary Easing (QQE), the presence of rational inattention and information stickiness has slowed the pace of the rise in firms’ inflation expectations.

[4]The Consumption Activity Index

The Consumption Activity Index is monthly calculated and published by the Research and Statistics Department of the Bank of Japan. The data are released at 2:00 p.m. (JST) on the fifth business day of each month. See the Bank of Japan website for the details and the data. Please note that I have nothing to do with regularly updating the data; for any questions about the latest data, please contact the Research and Statistics Department of the Bank.

[5]Rejuvenation and Economic Growth