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Recent research has found that the dynamic properties of the New Keynesian model can be very different when the nominal interest rate is zero. Improvements in technology and reductions in the labor tax rate lower economic activity, and the size of the government purchase output multiplier can be well above one. This paper provides evidence that the focus on specifications of the New Keynesian model that produce unorthodox results in a liquidity trap may be misplaced. We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan's episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties.

AbstractThis paper investigates how a prolonged period of low‐interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994–2015. We find that low‐interest rates induce banks to shift their activities from interest‐generating to fee‐related and trading activities. This rebalancing is stronger for low capitalised banks. Banks also moderately adjust their funding structure, away from short‐term market funding towards deposits. We observe a concomitant decline in the risk‐weighted asset ratio and a reduction in loan‐loss provisions, which is consistent with signs of evergreening.

My dissertation seeks to better understand the unconventional monetary policies that the Federal Reserve and the Bank of Japan have been conducting for the past decade and how these policies influence the markets of government securities, money, and credit. In the first chapter, I study market friction and its implication for the Federal Reserve's quantitative easing policies. Given sufficient market friction, changes in the supply of Treasury securities can affect yields. This research adds to our understanding of the supply effects of quantitative easing because the mechanics of Treasury auctions and the Federal Reserve's implementation of quantitative easing are similar. I examine the slopes of Treasury auction demand based on the bids and the changes in interest rates around the times of Treasury auctions between January 2000 and January 2011. From the implied quantity impact of these estimates, I infer an upper bound on the supply effects of quantitative easing. The finding suggests that quantitative easing is more effective when market frictions are high. Forward guidance is another way a central bank can ease the economy. My second chapter uses the Svensson yield curve model to fit and calculate a measure of policy duration to infer the effects of central bank guidance. Using the policy duration and interest rate time series for both the US and Japan, I attribute their movements to various types of news from newswire reporting. I find that much of the movements from the time series are due to non-central bank events. Monetary policy ultimately seeks to affect the real economy. My final chapter (co-authored with Ulrike Schaede) looks at the real effects of monetary policies in Japan. The Japanese Tankan survey is used to disentangle the change in bank lending and the change in firm borrowing at the industry level. Thus, we can examine how policy variables correlate with trade credit as well as bank lending needs from the 1980s to 2009. We find that the relationship of trade credit and bank loan is different depending on whether firms are constrained on the supply or demand side