Quantitative easing, credibility and the time-varying dynamics of the term structure of interest rate in Japan

A key issue in current research about quantitative easing monetary policy (QEMP) is the ability of this strategy to impact the term structure of interest rates. Using a dynamic model for the yield curve with time-varying-parameters to the Japanese data, we provide three insights. First, the expectations hypothesis of the term structure of interest rates is generally supported even during the QEMP period. Second, the estimation results reveal that the contribution of macroeconomic variables on the variation of the yield curve is relatively small, especially during the QEMP period. As for the feed-back effect, the yield curve factors contribute only marginally to inflation variation. However, they account for more relevant part of output gap dynamics. Third, the monetary policy shock has a significant effect on yield curve level factor only during the high interest rate periods. However, the decline in the level factor during the QEMP period, while insignificant, indicates a strengthening credibility of the Bank of Japan and thus the effectiveness of its policy.