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Empirical Economics

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24-03-2016

The Japanese Taylor rule estimated using censored quantile regressions

Authors: Jau-er Chen, Masanori Kashiwagi

Published in: Empirical Economics | Issue 1/2017

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Abstract

This paper conducts quantile regressions and obtains detailed estimates of monetary policy rules in Japan using a sample that includes recent periods of zero interest rates. Taking into account censoring and endogeneity, we compute censored quantile instrumental variable estimators and compare them with estimates from uncensored quantile regressions. The estimation results indicate that not accounting for censoring of interest rates tends to result in downwardly biased estimates. Moreover, our censored quantile regressions lead to relatively flat coefficients of inflation and insignificant coefficients of the output gap over the conditional interest rate distribution, suggesting that monetary policy in Japan may be well described by a linear rule.

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Among studies using such conventional methods, Clarida et al. (1998) estimate the monetary policy reaction functions for six countries—France, Germany, Italy, Japan, the UK, and the USA—and Bernanke and Gertler (1999) study those of the USA and Japan. See also Kuttner and Posen (2004) for estimations of the Japanese policy reaction function.

The UQIV methods are implemented by setting an arbitrarily small left-censoring point under the CQIV methodology.

Although Chevapatrakul et al. (2009) present data up to 2005 for Japan, their estimation uses a sample that ends before February 1999, to study the monetary policy when the ZLB is approached.

The 2SQR methodology is based on the fitted value approach, which extends Amemiya (1982), whereas the IVQR method builds on the instrumental variable approach suggested by Chernozhukov and Hansen (2005, 2006, 2008).

The call rate data are available from July 1985 at the Bank of Japan’s web site.

In Japan, inflation of CPI less fresh food is called core inflation, and it is the main inflation series considered by the Bank of Japan.

Following the Bank of Japan, the effects of consumption taxes have been controlled for.

For example, in December 2012, the uncollateralized call rate was 0.082 %.

The core inflation of late 2006 and 2007 is explained largely by energy prices. If the CPI for all items less food and energy is used to construct inflation rates (called core–core inflation in Japan), the resulting series shows low or negative inflation during that period.

See Choi and Portnoy (2016).

The control variables here are estimated through the quantile-regression-based procedure constructed by Chernozhukov et al. (2015), which is valid in a nonadditive quantile regression setup. The specific construction of the trimming indicator, \(\mathcal {T}\), is found in their paper.

In our quantile regressions (both uncensored and censored), we estimate the coefficients at the following quantiles of the conditional interest rate distribution: 0.05–0.95 with a grid of 0.05.

The same limitation arises in identification and estimation of average structural effect in a triangular simultaneous equations model without additivity. The setups considered in the literature on control variables restrict heterogeneity: the residual in the structural first stage is one-dimensional, cf. Imbens and Newey (2009).

For UQIV and CQIV, the CIs for the parameter of interest are constructed through a weighted bootstrap with 400 repetitions.

This result may appear to contrast with Kim and Mizen (2010), who point out that ignoring the ZLB on interest rates biases the estimates upward. Note that, however, their estimation results are derived from a Tobit-type model which relies on parametric distributional assumptions. Chung and Goldberger (1984) show that under considerably weak distributional assumptions (even without normality), whether an upward or downward bias of the estimate occurs depends on the covariance between latent and actually observed variables, the variance of the latent variable, and the probability of the event that the latent variable is larger than the censoring point.

We thank a referee for raising the points addressed in this paragraph.

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Title: The Japanese Taylor rule estimated using censored quantile regressions
Authors: Jau-er Chen
Masanori Kashiwagi
Publication date: 24-03-2016
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 1/2017
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-016-1074-8

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