Unconventional Monetary Policy and a Financial Intermediary: Were they Relevant to Fluctuations in the Japanese Economy?

In this paper, we study whether the implementation of unconventional monetary policy (UMP) in Japan is relevant to its economy fluctuations. We conducted a Bayesian estimation of a DSGE model with an endogenous financial intermediary, and the central bank in the model is allowed to conduct a credit policy. Our findings can be summarized in the following three points: first, we find that the estimated posterior distribution of model parameters and the impulse response provide a plausible interpretation of the data. Second, by shock decomposition, we find that the credit supply shock of the bank sector played a crucial role in the GDP and investment fluctuations in the sample period. Third, the estimated risk spread reveals a high degree of correlation to the actual credit spread in Japan. Our estimation results suggest that UMP in Japan is effective in the sense of narrowing credit spreads, which leads to subsequent increase in investment and, in turn, positively affects the economy.