Real Effects of Quantitative Easing at the Zero-Lower Bound: Structural VAR-based Evidence from Japan

Using monthly post-1995 Japanese data we propose a new sign-restriction based approach to identify monetary policy shocks when the economy is at the zero-lower bound. The identifying restrictions are thoroughly grounded in liquidity trap theory. Our results show that a quantitative easing shock can lead to a significant but temporary rise in industrial production. The effect on inflation, however, is not significantly different from zero. Our results are robust to different specifications, in particular to the further identification of aggregate demand and supply shocks under liquidity trap conditions. Accordingly, our results imply that while the Japanese Quantitative Easing experiment was successful in stimulating economic activity in the shortrun, it did not lead to any increase in the inflation rate. We believe these results are interesting not only for the Japanese economy, but also for other advanced economies, such as the U.S., where monetary policy is constrained by the ZLB.