Abstract:-
Using the lens of a medium scale DSGE model, we analyze the macroeconomic effects of Japan’s unconventional monetary policy which is known as Qualitative and Quantitative Easing (QQE). We model QE as a reserve injection by the Central Bank to the banking system. Our focus is on the Japanese bond market. We model heterogenous responses of the yield curves of coupon bonds of various maturities to a positive QE shock instead of the extant approach of modelling a single bond yield using an exponentially decaying coupon. Our model successfully replicates the negative effects of a positive QE shock on the nominal bond yields of various maturities which is in line with the experiment of yield curve control of Bank of Japan in recent years. Second, our model has the potential of replicating the observed nonlinear hump shape yield response of bonds with shorter maturity. The other features of our model are: (i) excess reserve demand function of commercial banks in response to liquidity risk, and (ii) linkage among central bank, commercial banks and the government via government bonds and bank reserve.
