Working Paper: CEPR ID: DP2435
Authors: James Morsink; Tamim Bayoumi
Abstract: This paper uses vector autoregressions to examine the monetary transmission mechanism in Japan. The empirical results indicate that both monetary policy and banks' balance sheets are important sources of shocks, that banks play a crucial role in transmitting monetary shocks to economic activity, that corporations and households have not been able to substitute borrowing from other sources for a shortfall in bank borrowing, and that business investment is especially sensitive to monetary shocks. We conclude that policy measures to strengthen banks are probably a prerequisite to restoring the effectiveness of the monetary transmission mechanism.
Keywords: monetary transmission mechanism; bank behaviour; Japan
JEL Codes: E50; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Economic activity (E29) |
| Banks' balance sheets (G21) | Economic activity (E29) |
| Bank lending (G21) | Private demand (D12) |
| Changes in the overnight call rate (E52) | Private demand (D12) |
| Changes in the overnight call rate (E52) | Bank loans (G21) |
| Disturbances to bank credit (G21) | Private demand (D12) |
| Banking strains (G21) | Transmission mechanism (F42) |