Were there structural breaks in the effects of Japanese monetary policy? Re-evaluating policy effects of the lost decade

Abstract

This paper employs block recursive structural VAR models with Markov switching for modeling monetary policy and private sector behavior of the Japanese economy. By estimating the endogenous structural breaks, we investigate the existence, number, and nature of breaks possibly implied by the monetary policy adopted between 1975 and 2002. Results indicate that the Japanese economic system is best described by a non-absorbing two-state model, with major break happened around 1996. We also confirm that the interest rate monetary policy was effective before 1996, while monetary base shocks are identified as monetary policy shocks only after 1996. J. Japanese Int. Economies 22 (3) (2008) 320-342. � 2008 Elsevier Inc. All rights reserved.