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Working Paper

Central Bank Credibility During COVID-19: Evidence from Japan


Abstract: Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.

Keywords: affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection;

JEL Classification: C32; E43; E52; G12; G17;

https://doi.org/10.24148/wp2021-24

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2021-12-21

Number: 2021-24

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