Not to be quoted

Comments on “Central Banking in theCredit Turmoil / Marvin Goodfriend”
Hiroshi Ugai
Bank of Japan
2009 International Conference
May 28, 2009

The Views expressed herein are those of the author anddo not necessarily reflect the views of the BOJ.

Bank of Japan1. A Central Bank Conducting “Pure MonetaryPolicy” at the Zero Bound
Prof. Goodfriend’s Model

From My Point of View……

(1) An increase in the MB at the zerobound affects economic activity andprices.
(2) Credit policy is fiscal policy.
To conduct credit policy, agreementwith the Treasury is needed.
(3) Should adhere to Treasury-only policy.
Should purchase long-term Treasuries
until this action exerts marked effects.

(1) This effect is negligible or small, if
any.

Image of this central banking:A central bank which establishes theterritory of monetary policy and acts
against deflation by aggressively using
the effective tools.

Image of this central banking:A central bank which has lost its
independence as well as its effective tools,
and is forced to monetize government
debts.

(2) A central bank cannot take effective
actions because it has to conclude anagreement with the Treasury every time.
(3) This effect is small, if any.
Mega-purchases are the monetizationof government debts.

22. Which View Is More Plausible?
(1-1) How effective is the increase in the MB at the zero bound?
Fujiwara (2006)
Impulse responses to a monetary base shock MSVAR(4) after regime switchyp

Confidence intervals: 10th and 90th percentile values.

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Kimura and Small (2006)
The effects of increasing current account balances at the BOJ on
credit spreads of corporate bonds

CS: Credit Spreads
IR: Yields on 10-year JGBs
HV: Historical volatility of the credit spreads
IVS: Implied volatility of the stock price index
Proxy for implied volatility of corporatebond prices
CA: Outstanding amount of current accountbalances
OP: Outstanding amount of outright purchases oflong-term JGBs by the BOJ

Decrease in premiums(Effective)
Increase in premiums(Harmful)(Note)***/**/* denotes significance at the 1/5/10 percent level.

4(1-2) How effective is the CB’s purchases of long-term Treasuries?
Oda and Ueda (2005)
The effects of the BOJ’s purchases of long-term JGBs on the risk
premium component of short- to medium-term interest rates
Regression Method: Maximum Likelihood with AR(1)Period: 1995/Q1-2003/Q4
Risk premium components
10-year5-year3-year

BOJ's current account balance-0.016

0.003

0.008

Standard error
P-value

0.01
0.23

0.01
0.72

0.01
0.30

BOJ's share of JGBs

0.020

0.065

0.061

Standard error
P-value

0.07
0.76

0.04
0.14

0.04
0.13

Turnover rate of JGBs

-0.19

-0.17

-0.14

Standard error
P-value

0.08
0.020.06
0.01

0.05
0.01

Spread between TB and CD

0.59

0.11-0.04

Standard error
P-value

0.58
0.32

0.43
0.81

0.38
0.92

Constant

2.00

0.13-0.26

Standard error
P-value

1.27
0.13

0.83
0.87

0.75
0.73

AR(1)

0.40

0.26

0.29

Standard error
P-value

0.16
0.02

0.15
0.11

0.16
0.08

Adjusted-R2
Std. err. of equation
D.W. ratio

0.55
0.28
2.38

0.40
0.21
2.12

0.33
0.18
1.82

Statistically Insignificant

5Kimura and Small (2006)
The effects of the BOJ’s purchases of long-term JGBs on creditspreads of corporate bonds
CS: Credit Spreads
IR: Yields on 10-year JGBs
HV: Historical volatility of the credit spreads
IVS: Implied volatility of the stock price index
Proxy for implied volatility of corporatebond prices
CA: Outstanding amount of current accountbalances
OP: Outstanding amount of outright purchases oflong-term JGBs by the BOJ

Decrease in premiums(Effective)
Increase in premiums(Harmful)（Note）***/**/* denotes significance at the 1/5/10 percent level.

6(2) Should a CB continue to purchase anenormous amount of long-term Treasuries until
the purchases become effective significantly?
(a) the amount of improving economic conditions(b) the amount of losing confidence in the CBIf (a) > (b), the confidence in the CB would be lost.

7(3) Is the agreement between the CB and theTreasury on an inflation objective sufficient
to prevent the risk of inflation?
The time inconsistency problem of the government.

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(4) In sum, should a CB attempt this policy
framework to ascertain whether it works?
Once the confidence in the CB and thecurrency is lost, it is impossible to regain it easily.

93. To What Extent Is a CB’s Credit Policy
Necessary in the Current Turmoil?
• Imperative to improve the market and financial intermediation
functioning in order to make monetary policy transmission
channels effective.

• All major CBs worldwide are conducting a kind of credit policy.
• Sympathy with Prof. Goodfriend in that CBs’ policy actions areapproaching the area of the fiscal policy....A CB has to find away to maintain its basic stance of being cautious.
--- However, no single answer to the question about thedesirable way to set principles.
• Important for a CB to conduct credit policy with its own
decision and responsibility.
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