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Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model

Author

Listed:
  • Satoshi Hoshino

    (Faculty of Economics, Okayama Shoka University / Research Fellow, Graduate School of Economics, Kobe University)

  • Daisuke Ida

    (Faculty of Economics, Momoyama Gakuin University / Research Fellow, Graduate School of Economics, Kobe University)

Abstract
This paper reevaluates the role of asset price stabilization in Japan during the 1980s through a Bayesian estimation of the dynamic stochastic general equilibrium model. Our results show the presence of the wealth channel from increased stock prices in Japan. In addition, we argue the possibility that the Bank of Japan (BOJ) may have conducted its monetary policy by targeting the stock price stability in addition to inflation and the output gap. The BOJ's response to stock price movements as a matter of policy, however, is subject to considerable uncertainty. Our results indicate that while the BOJ may have reacted to stock prices deviated from their fundamental values, it could not prevent a stock price bubble simply by implementing a contractionary monetary policy shock. Therefore, we conclude that the BOJ's monetary policy stance aimed at stabilizing stock price fluctuations and minimizing macroeconomic volatility, whereas endogenous volatility was caused by bad shocks.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Satoshi Hoshino & Daisuke Ida, 2021. "Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model," Discussion Papers 2116, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2116
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2021/2116.pdf
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    References listed on IDEAS

    as
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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