Title: Empirical analysis on the effect of the fiscal policy in the zero lower bound of nominal short-term interest rate
Authors: Hiroshi Morita - Hosei University (Japan) [presenting]
Abstract: For the Japanese economy, the aim is to empirically examine whether the effectiveness of a fiscal policy depends on the stance of monetary policy by comparing the two different approaches which build on the standard time-varying parameters VAR model. In the first approach, the coefficients in the interest rate equation except for its own lags are set to be zero during the period of zero-lower bound (ZLB) to represent the actual situation of ZLB period in which short-term interest rate hardly reacts to any economic variations. We call this model TVP-VAR model with ZLB because it represents the actual situation of ZLB period in which short-term interest rate hardly reacts to any economic variations. In the second approach, we construct TVP-VAR model with a censored variable to compute the implied interest rate when the interest rate hits the ZLB. We call the second model the TVP-VAR model without ZLB, so that this model embodies a counterfactual situation without the ZLB of a nominal interest rate. As a result of comparing fiscal multipliers derived from these two models, we cannot detect the significant evidence that the zero-interest rate policy enhances the effectiveness of the fiscal policy in Japan.