Big in Japan: a structural scenario analysis of monetary policy dynamics

Böðvarsdóttir, Inga Rósa; Fernandes, Catarina; Roman, Kajsa; Schuster, Yuma; Skoblar, Ana

Big in Japan: a structural scenario analysis of monetary policy dynamics

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Böðvarsdóttir, I, Fernandes, C, Roman, K, Schuster, Y, Skoblar, A. Big in Japan: a structural scenario analysis of monetary policy dynamics. 2024. handle: http://hdl.handle.net/10230/68456

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Abstract

Japan, a pioneer in unconventional monetary policy, recently brought an era of negative interest rates to an end with its first hike in 17 years. We use structural scenario analysis to assess the impact of Bank of Japan's (BoJ) policy rate hike and alternative paths on its economy, considering different scenario drivers. Across a baseline, contractionary, and expansionary scenario driven by either supply or demand shocks, our analysis clearly distinguishes the effectiveness of policy interventions on inflation and industrial production depending on the shock driving the scenario. Our findings suggest that the BoJ’s monetary policy tools effectively combat supply shocks, while their demand-driven interventions have a limited impact on the economy.