Silviase/jgov_v1.4_full_ann huggingface dataset:
## Japan:

JPY: GNP at 1985 Price (Billion Yen)

JPW: Wholesale Price Index (1985=100)

JPC: Consumer Price Index (1985=100)

JDEF: GNP Deflator at 1985 Prices

JBP: Current Account Balance (million $US)

JR: Foreign Reserves (million $US)

JIIP: Industrial Production Index (1985=100)

JEX: Exchange Rate (Yen/\$US)

JM1: Money (Billion Yen)

JM2: Money+Quasi-money+CD (Billion Yen)

JMR: Call Rate (\%)

JDR: Discount Rate (\%)

JIIP: Industrial Production Index (1985=100)

Korea:

KRY: GNP at 1985 Price (Billion Won)

KRPW: Wholesale Price Index (1985=100)

KRPC: Consumer Price Index (1985=100)

KRDEF: GNP Deflator at 1985 Prices

KRBP: Current Account Balance (million $US)

KRR: Foreign Reserves (million $US)

KRIIP: Industrial Production Index (1985=100)

KREX: Exchange Rate (Won/$US)

KRM1: Money (Billion won)

KRM2: Money+Quasi-money (Billion won)

KRDPR: Deposit Rate (\%)

KRDR: Discount Rate (\%)

KRMR: Money Market Rate (\%)

KRIIP: Industrial Production Index (1985=100)
## I ndonesia:

IY7: GDP at 1973 Price (Billion Rupia)

IY8: GDP at 1983 Price (Billion Rupia)

IPW: Wholesale Price Index (1985=100)

IPC: Consumer Price Index (1985=100)

IDEF7: GDP Deflator at 1973 Price

IDEF8: GDP Deflator at 1983 Price

IBP: Current Account Balance (million $US)

IR: Foreign Reserves (million $US)

IIIP: Industrial Production Index (1985=100)

IEX: Exchange Rate (Rupia/\$US)

IM1: Money (Billion Rupias)

IM2: Money+Quasi-money (Billion Rupias)

IMR: Money Market Rate (\%)

IDPR: Deposit Rate (\%)

OP: Oil Price ($/bbl)

## The Philippines:

PHY: GNP at 1985 Price (Billion Pesos)

PHPW: Wholesale Price Index (1985=100)

PHPCC: Consumer Price Index (1985=100)

PHDEF: GNP Deflator at 1985 Prices

PHBP: Current Account Balance (million $US)

PHR: Foreign Reserves (million $US)

PHIIP: Industrial Production Index (1985=100)

PHEX: Exchange Rate (Peso/\$US)

PHM1: Money (Billion Pesos)

PHM2: Money+Quasi-money (Billion Pesos)

PHTBR: Treasury Bill Rate (\%)

PHLR: Bank Lending Rate (Average %)

## Note:

(1) (-1) indicates for one period lagged variables, and (-2)

indicates for two periods lagged variables.
## Conclusion - Targets, Effectiveness and Results of Monetary Policy

In the previous chapters, we have studied the monetary policies of four Asian countries by applying reaction function, money demand function, and VAR, to determine policy targets and results.

In interpreting the results, we must recognize that these analyses do not have direct relationships to each other, and they are under different assumptions, and they employ different partial equilibrium analysis. In spite of these features, in this chapter, we will attempt to evaluate the monetary policy of four countries from the conclusions of each study by following Table 5-1, in which all the results are summarized.

### 5.1 Summary of individual countries

## (1) Japan

In the fixed exchange rate period (1962Q1 to 1973Q1), targets of the monetary policy of Japan, shown by reaction (response) functions on discount rate, were real GNP growth, growth of industrial production and current account balance. On the reaction function of the money supply, real GNP growth, growth of industrial production and exchange rate were significant. When we applied lagged macroeconomic variables in the response function on discount rate and money supply, we have confirmed that the monetary policy in the first period rather responded to the contemporaneous information. The result of the response function with the rolling regression method show that relevance of monetary policy explicates considerable variability in the first period. We can interpret that monetary policy was executed in line with the well-known principle of “Stop-and-Go.”

The significance level of money demand function on both interest rate and money supply, for the first period was 10%, and the result of sequential Chow test shows an apparent structural break in early 1970's. In spite of these questions, we can generally accept that the estimations of money demand function in the first period show significant results.

VAR analyses show strong mutual relations between interest rate and real GNP growth which indicate “fine tuning” policy by using interest rate as a policy tool. However, relationship between money supply and interest rate was not so strong, and this result shows that other variables had stronger impact on money supply or interest rate than the mutual effect between these two monetary variables.

We can summarize the monetary policy of Japan in the first period that monetary authorities focused on adjusting current account balance and the real economic growth, while money demand function shows a background not so strong but acceptable for the implementation of monetary policy. These results confirm that “fine tuning” type of
monetary policy had been implemented.

In the second period, which is the flexible exchange rate period from 1973Q1 to 1990Q1, the results of the reaction function on discount rate show that the monetary authority's major concern was containing inflation. Also, from the reaction function on money supply, we can evaluate, with a lower confidence, that the concern of the monetary policy was containing inflation. The application of the lagged variables in the reaction function, showed that the discount rate responds to the contemporaneous changes of the exchange rate movements and wholesale prices. On the other hand, the importance of the inflationary consideration revealed in the second period. Increasing significance of money demand functions show that the background of the effectiveness of monetary policy is becoming stronger. However, from the result of the sequential Chow test, we should note that there instability exists due to the structural break in the early 1970's.

The results of the monetary policy from VAR estimation still indicate strong effect of interest rate on real economic growth, but the interest rate itself was strongly influenced by inflation or exchange rate, indicating that the interest rate was not determined independently.

We can conclude that, in general, the monetary policy of Japan had clear targets, had been implemented appropriately and the result is significant.

## (2) Korea

In the fixed exchange rate period (1970Q1 to 1979Q4), results of the reaction function show that discount rate is responding only to the growth of industrial production, but money supply is responding to inflation rate and current account balance. When we applied lagged macroeconomic variable, current account balance and GNP deflator for the discount rate, and consumer price for the money supply responded. From the analysis of the rolling regressions, current account balance, in the whole part of the first period, and inflation, in the latter part, showed up as the target of monetary policy. We can interpret and confirm that there was a Stop-and-Go character of monetary policy in this period. When we consider the interest rate in Korea was a tool of rationing of the subsidized credits; only the reaction function on money supply is supposed to demonstrate the targets of the monetary policy. Money demand function is significant, only for 10% level, both on interest rate and money supply respectively, which leaves doubt as to the effectiveness of the monetary policy in Korea. From the result of sequential Chow test, the appearance of the structural break shown in the late 1974 might have been indicating this result. VAR analyses show an impact from money supply on real GNP growth and inflation, but mutual relations between variables are weak. We can conclude that Korean monetary authorities intended to stabilize the country's macroeconomic situation, especially containing inflation and adjusting current account
balance by using money supply and discount rate as a policy tool. However the result of the monetary policy does not show significant effectiveness.

In the second period, targets of the monetary policy, demonstrated by the reaction function on discount rate, can be identified by growth of real GDP and industrial production, but no variable was significant in reaction function on money supply; a result which remains as a puzzle in our study. Many explanations can be offered as we have done in Chapter 2. Applying lagged macroeconomic variables in the response function did not change the result significantly. Results of the rolling regression is suggesting the change of the relevance of targets of the monetary policy, such as Stop-and-Go character in 1984, stabilization aspects in 1983, and anti-inflationary aspects in 1988. Significance of money demand function slightly improved compared to the first period, confirming that the effectiveness of monetary policy also improved in the second period. As in the analysis of the first period, result of the sequential Chow test shows a possibility of structural break in 1983. Results of VAR analysis only show the strong relationship between interest rate and inflation rate. But when we replace money market by discount rate, the result turns out that money supply affects interest rate and real GNP growth which suggests the effective result of the monetary policy.

We can summarize that Korean monetary policy approached that of Japan in the 1980's, even with the existence of strong credit rationing mechanism of the monetary policy. This result might be indicating that the effect of financial liberalization is gradually becoming apparent in the 1980's.

## (3) Indonesia

In the case of Indonesia, because the discount window was not used as a policy tool, we only estimated the reaction function on money supply. In the first period, no variable showed significance in the reaction function on money supply. However, the result of the response function with the application of lagged macroeconomic variables suggested the existence of serious time lag problem in Indonesia. From the result of the rolling regression, stabilization character weakly revealed in 1979 and 1980. Money demand function, even though there is a sign of structural break in 1982, shows acceptable significance level informing us of suitable conditions for the monetary policy to be effective. When we attempted to examine the result of monetary policy by VAR analysis, we found strong influence of oil price on the entire economy, which made other variables ineffective. Naturally, monetary policy had limited effect on macroeconomic conditions.

The results of the analysis in the second period show that reaction function became significant on inflation rate. Particularly this result was confirmed by the application of the rolling regression method. Money demand function shows an acceptable significance level.
Table 5-1 Analysis of Monetary Policy

Country	Period	Reaction Function	Money Demand Function	VAR
Japan	1962Q1 - 1973Q1	Discount rateJPY, JIIP, JBP(JDEF@)Money SupplyJPY, JIIP, JBP, (JR)Discount rate(JGNP), JPW, JIIP, JEXMoney Supplynone(JPW@, JDEF@)	Interest rate 10%GNP 10%	JPY < - > JMRJM2 - > JMR
1973Q2 - 1990Q1	Interest rate 1%GNP 1%	JM2 - > JWPMJR - > JPY JPW - > JPYJMR < - > JPW
JEX - > JMR *JMR - > JPY*
Korea	1970Q1 - 1979Q4	Discount rateKRIPPMoney SupplyKRPW, KRDEF, KRBPDiscount rate(KRY), (KRIPPMoney Supplynone(KRIP@, KRBP@, KRDEF@)	Interest rate 10%GNP 1%	KRM2 - > KRY, (KRM2 - > KRPW)
1980Q1 - 1990Q1	Interest rate 10%GNP 5%	KRMR < - > KRPWKRMR - > KRY, KRMR - > KR2M**KRMR - > KREX*
Indonesia	1976Q1 - 1983Q4	Money SupplyNone	Interest rate 10%GNP 1%	IM2 - > IPW, IPW - > IY7OP - > IY7, OP - > IM2***
1983Q1 - 1990Q1	Money SupplyIPW	Interest rate 5%GNP 5%(1983Q3 - 1990Q1)	IMR - > IY8, IM2 - > IY8IM2 - > IPW IPW - > IM2OP - > Y, R - > Y, M - > Y***R - > OP, M - > OP, OP - > M***
Philippines	1981Q1 - 1990Q1	Discount ratePHPW, PHPC, PHDEF, PHR, (PHBP)Money supplyPHY	Interest rate XGNP 10%	PHM2 - > PHY, PHPW - > PHYPHPW - > PHTBR, PHW2 - > PHPW

* Exchange rate (local currency per $US) replacing wholesale price index.

** Discount rate replacing money market rate.

*** Oil price ($/bbl) replacing wholesale price index.

NOTE(1) Variables in parenthesis are results of the estimation which were less significant (Significance level over 10% in response function and slightly less than 10% contribution on variance decomposition in VAR)

NOTE(2) Variables in parenthesis with @ are the variables which could be considered

as targets from the rolling regression analysis.

NOTE(3) For the definition of variables, see Chapter 4.
with a sign of structural break in 1986 shown by the result of sequential Chow test. The effect of oil prices became less influential, which was apparent from VAR analysis, and effects of other variables became stronger in the second period.

We can conclude that in the case of Indonesia, there was the dominant effect of oil, and we could not find significant targets or results of the monetary policy in the first period. In the second period, which include late 1980's, the oil effect diminished but still had an impact on the Indonesian economy. Financial liberalization seemed to have a positive effect, when we take into consideration the result of money demand function, and the result of VAR estimation showing the increasing effect of monetary variable on other economic variables.

## (4) The Philippines

The monetary policy of the Philippines provided the most interesting and puzzling results in our study. Reaction function indicates that the authorities were trying to apply countercyclical monetary policy. But the result of the rolling regression showed the puzzling result do to the fact that most of the coefficients showed significance with opposite signs. However, the result of the regression with lagged variable showed that the information problem was not so critical. Money demand function shows insignificant effect on interest rates. But when we constructed money demand function replacing interest rate by expected inflation rate, the result became significant. This means that the transmission mechanism of the money supply is completely different from that of the traditional money demand function. VAR analysis suggests that the result of the monetary policy was extremely confusing and we could not obtain satisfactory explanation of the relationship between variables.

### 5.2 Target, effectiveness and the result of the monetary policy

In the introduction, we raised several questions which will be investigated in this study. Here, we would like to check whether the answers to these questions were given or not.

“What are the targets of the monetary policy?” We found from the estimation of the reaction functions that containing inflation was the common target in all countries. In the limited cases such as Japan in the first period, Korea in the first period, and in the Philippines, real GNP growth or growth of industrial production, which can be considered as adjusting business cycle, were targets of monetary policy. We are able to conclude that the targets of the monetary policy in these countries were used as a tool of stabilization, mainly by controlling inflation.

“Is there a stable base for the monetary policy to function effectively?” The results of estimation of the money demand functions of Japan, Korea and Indonesia, generally show
the existence of stable relationship between money demand, interest rate and income. However, in the case of the Philippines, we obtained a completely insignificant coefficient. But in an alternative estimation, we found that the expected inflation was significant.

“Did monetary policy had real effects on the macroeconomic conditions?” From the VAR analysis, we found that the interest rate had significant impacts on real economic growth in Japan, Indonesia in the second period, and Korea in the second period. Money supply had impacts on real GNP (GDP) growth in Korea in the first period, Indonesia in the second period, and in the Philippines.

One interesting finding was that the F-value of the VAR equation in almost all the variables in the “second periods” of Japan, Korea and Indonesia is increasing. These results suggest that the relationships between monetary variable and other economic variables are increasing, which implies that the effect of the monetary policy is getting stronger.

### 5.3 Economic development and monetary policy

Despite the small sample of countries, we are able to characterize the results by stages of economic development. When we classify the countries by development stage, Japan is apparently a developed country, Korea is a representative of fast-growing NIEs, and Indonesia and the Philippines are developing countries. Concerning the results of the reaction function of Japan and Korea, we can see clear objectives of the monetary policy. Money demand functions in both countries show significant results indicating suitable conditions for effectiveness of the monetary policy. From the VAR analysis, we found that money supply and/or interest rate had effects on real economic growth.

Indonesia and the Philippines show interesting contrasts. Comparing the economic development stages of the two countries, represented by per capita GNP and industrial structure, the Philippines are in a developed stage compared to Indonesia. However, regarding macroeconomic management, we can see that Indonesia succeeded but the Philippines apparently failed. There are dangers injumping to that conclusion; but this result is suggesting that: in a developing country, reasonable monetary policy is one of the key elements of the stability of the macroeconomic management.

### 5.4 Remaining issues and possible future study

In this study, we applied the same model regardless of the level of economic development, exchange rate regime, or restrictions on capital mobility. With this method, we were able to obtain some common features and differences of the monetary policies. However, we must point out that there should be differences in the monetary policies when there are differences in the exchange rate management and restrictions on capital mobility.
We might have obtained different results by formulating an alternative method to explain monetary policy by using different models in which the differences in the exchange rates and restrictions in capital mobility could be considered. Furthermore, it is much more desirable to capture and analyze the interrelationship between monetary and exchange rate policies. $ ^{1} $ If these weak points are conquered, and if this study is expanded to many countries, we might be able to achieve comparative study of the monetary policies of different countries.

In this study, we applied a simple autoregressive model in estimating money demand function, and an applied VAR model based on the difference model to examine the result of monetary policy. However, we can expect more detailed and accurate results in the estimation of money demand function by examining the existence of cointegration and applying error correction model. Also, by executing a unit root test, if we apply Structural VAR by using level data, we will be able to identify the result of the monetary policy from the sign of the coefficients, and at the same time clearly examine demand shocks and supply shocks.

In Appendix 2, we attempted a trial study of foreign exchange rate policy with the application of response function and VAR analysis. We obtained common results that the target of foreign exchange rate policy were the adjustment of current account. But from the result of the VAR, exchange rate had stronger effect on economic growth. An interesting interpretation was shown as a comparison between the analysis of Korea and the Philippines. The finding of the analysis in Korea showed effective application of the exchange rate policy, while in the Philippine case it was not. This result might be suggesting close relation between overall macroeconomic performance and the exchange rate policy.

Furthermore, in this study, we employed three empirical methods, the monetary reaction function, money demand function, and VAR analysis, rather independently. However it is obvious that these three empirical analyses should be integrated into simple framework. A first step in this direction could be to estimate a small model which incorporates the determination of the money and money demand simultaneously. $ ^{2} $

These are tasks remaining for us in order to improve our study, which might enable more exciting results, and thus provide us with more information on the policy implications.
Even with these limitations, this study showed that the application of time series method on analyzing developing countries has possibility of deriving fruitful implications.
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