Monetary policy, oil price shocks, and the Japanese economy

Hamilton's [J. Monetary Econ. 38 (1996) 215] measure of oil price shock is statistically significant in explaining real activity in Japan and also has a statistically significant impact on the stance of Japanese monetary policy. It is estimated that the call money rate was higher by 2.0 percentage points due to the first major oil price shock in the mid 1970s and was higher by about 2.5 percentage points due to the second major oil price shock in 1979-1980. It is found that between 30 and 50 percent of the negative impact of oil price shocks on Japanese output is attributable to monetary tightening induced by oil price shocks. This result continues to hold when the effects of domestic fiscal policy. US monetary policy, and exchange rate regime are recognized. (C) 2001 Elsevier Science B.V. All rights reserved.