Are Unprecedented Monetary Policy Effective: Recent Japanese Case

Abstract

This paper empirically analyzes the recent monetary policy in Japan with the era of Abenomics as the focus. Serious deflation damaged the Japanese economy and unprecedented monetary policy has been conducted to combat deflation. Stock prices have risen since the conduction of this unprecedented policy and low unemployment has been attained, but the effectiveness of the policy needs to be explored. This paper examines this problem from the view of inflation and GDP. Revised version of P* model is employed for empirical analyses. Empirical results indicate that monetary policy has been effective in recovering the economy (GDP), but there is no significant relationship between monetary expansion and inflation rate. To promote more monetary expansion is one choice, but there would be some side effects on the economy.