Output Composition of Monetary Policy Transmission Mechanism in Japan

In this paper, I investigate the output composition of monetary policy transmission mechanism in Japan. It is usually thought that the investment channel, namely the process that a change in interest rate alters the cost of capital and therefore investment, is more predominant in Japan. Yet, in the United States, it is commonly argued that the consumption channel through intertemporal substitution is more prevalent than the investment channel. The aim of this paper is twofold; 1) to understand which of the two channels; the consumption channel and the investment channel, is more signicantly predominant in the monetary transmission mechanism of Japan based on the analysis with VAR and DSGE models, and 2) to contribute the research concerning the "Output Composition Puzzle" advocated by Angeloni, Kashyap, Mojon and Terlizzese (2002) for the fact that the consumption channel is more prevalent in the United States but in Euro area investment channel is the predominant driver of output changes. The results obtained from the Japanese models are consistent with our intuitive conclusion that the investment channel is more important.