TAILIEUCHUNG - Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists

Four years after the launch of the euro in January 1999 and while the European Central Bank (ECB) plans a review about its monetary policy strategy, it seems interesting to study the link between monetary policy, the long-term perception of ináation and long-term interest rates. In the European case, it is possible to use the German term structure as a benchmark. But in this case, one feature is puzzling: how the long-term interest rates evolved in link with the expected path of the short-term interest rate, while this latter was under the control of the German monetary authorities until the end of 1998 (and normally depended of German. | MONETARY AND ECONOMIC STUDIES FEBRUARY2001 Monetary Policy under Zero Interest Rate Viewpoints of Central Bank Economists Hiroshi Fujiki Kunio Okina and Shigenori Shiratsuka Various proposals have been raised with respect to a desirable framework of monetary policy under the zero interest rate in Japan. By taking due account of such proposals this paper intends to examine monetary policy options under the environment of the zero interest rate. In so doing we first describe the policy framework of the zero interest rate policy which was in place from February 1999 to August 2000 and its transmission mechanism. Then in view of the problems intrinsic to the zero interest rate we address three important questions 1 the policy options that might be available in response to future economic developments 2 the major risks associated with these policy options and 3 how such risks might change under varying economic conditions. On this basis we finally consider the medium- and long-term style of monetary policy in Japan in order to improve its effectiveness and efficiency. Key words Zero interest rate policy Quantitative easing Open market operation of outright purchase of long-term government bonds Dispelling deflationary concern Styles of monetary policy management Hiroshi Fujiki Senior Economist Institute for Monetary and Economic Studies and Financial Markets Department Bank of Japan E-mail Kunio Okina Director Institute for Monetary and Economic Studies Bank of Japan E-mail Shigenori Shiratsuka Senior Economist Institute for Monetary and Economic Studies Bank of Japan E-mail 89 I. Introduction The primary objective of monetary policy conducted by the Bank of Japan BOJ is to maintain price stability thereby contributing to the sound development of the national economy. This mandate is clearly and indisputably defined in the Bank of Japan However when it comes to the implementation of .

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