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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 19, No. 1, pp.111-146
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2006
Received 12 Sep 2005 Revised 01 Nov 2005

Monetary Policy and Economic Activity in Japan, Korea, and the United States

R. Anton Braun ; Etsuro Shioji
Associate Professor, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku 113-0033, Tokyo, Japan, Tel: +81-3-5841-5620, Fax: +81-3-5841-5521 toni@e.u-tokyo.ac.jp
Associate Professor, International Graduate School of Social Sciences and Department of Economics, Yokohama National University, 79-4 Tokiwadai, Hodogaya-ku, Yokohama 240-8501, Japan shioji@ynu.ac.jp

JEL Classfication: E0, E5, F0

Abstract

A cornerstone of central bank policy is that a looser monetary policy is associated with lower interest rates, higher growth of narrow monetary aggregates, higher output and higher inflation. These responses, which we collectively refer to as the liquidity effect hypothesis, are commonly maintained in practice but are at odds with some leading models of money. This paper proposes and implements a methodology for assessing the liquidity effect hypothesis with two other hypotheses: The costly price adjustment hypothesis and the inflation tax hypothesis. We find surprisingly little support for the liquidity effect hypothesis in Japanese or U.S. data. The liquidity effect hypothesis receives its strongest support in Korean data.

Keywords:

Monetary policy, Economic activity, Japan, United States

Acknowledgments

Paper presented at the 13th Seoul Journal of Economics International Symposium, September 23, 2005 at Seoul National University. We thank our discussant Jang Ok Cho and also Fabio Canova and Harald Uhlig for helpful comments. We have also benefited from comments by workshop participants at CERGE-EI at Charles University, the Central European University, Humboldt University, RIEB at the Kobe University, and Seoul National University. We both acknowledge financial assistance from the Japanese Ministry of Education.

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