Silviase/jgov_v1.4_full_ann huggingface dataset:
Fig.3 : One SD increase in Japanese real base money: on GDP (smpl, 1990–2013)

In Figure 3, I depict the impulse response functions of a one standard deviation (SD) increase in Japanese base money on the GDPs of Japan, Korea, China, and Thailand. Here a one SD increase in log real base money means a 4.0 percent increase in the level of real base money.

From the impulse responses, I find that a real base money increase of this magnitude lowers Japanese GDP by 0.2 percent on impact. The impact on Japanese GDP growth turns positive in eight quarters, and reaches a peak of 0.3 percent of GDP by 22 quarters. Korean GDP falls by 0.3 percent on impact and remains lower by 0.2 percent of GDP for over 40 quarters. Chinese GDP, after initially falling by 0.2 percent, returns to its original long-run level by 22 quarters. Thai GDP, after sharply falling by 0.4 percent, rises rapidly and increases by 0.3 percent of GDP by 28 quarters. From the impulse responses, I see a pattern wherein GDP of all countries first falls and then rises over time. Japanese and Thai GDPs increase in the medium-run. Korean GDP falls in the medium-run, and Chinese GDP is unchanged.
Fig.4 : One SD Increase in Japanese real base money: response of real exchange rate against U.S. dollar

I next examine the effects of Japanese monetary expansion on real exchange rates, inflation, real equity The values, and long-term nominal interest rates. In Figure 4, I depict the changes in each country's currency against the U.S. dollar in response to the increase in Japanese base money. Until about three quarters, the Japanese yen depreciates the most against the U.S. dollar, so the yen is depreciating against all other Asian currencies. The yen depreciation upon impact is quite large-1.5 percent. By the fourth quarter, the yen starts appreciating against the Thai Baht, and by the ninth and eleventh quarters, the yen is appreciating against the RMB and the won. Thus, we can see that the yen starts depreciating against the Baht within a year and starts depreciating against the won and the RMB in two to three years.

It is well-known that in the real world, China, and to a much lesser extent Korea and Thailand, peg their currencies against the U.S. dollar. In the GVAR model, while nominal pegs are allowed, real exchange rates are assumed to be flexible $ ^{6} $ . In addition, in the GVAR model, all currencies are defined in terms of the U.S. dollar (in real terms). Therefore, when the yen depreciates against the U.S. dollar and Asian currencies depreciate less against the U.S. dollar, the yen is effectively depreciating against the Asian currencies (as mentioned in the previous paragraph).

In Figure 5, a one SD increase in base money has almost no effect on the long-run
Fig.5: One SD increase in Japanese real base money: response of inflation rates

inflation rate in Japan (in fact, inflation rates fall slightly in Japan). The spillover effects on inflation in Japan's neighbors are also small. A one SD increase in Japanese real base money raises Chinese inflation by 0.08 percent. Thus, we can say that the expansionary effects of an one SD increase in Japanese base money on inflation in all of the countries are negligible.

That the increase in Japanese base money has no effect on the Japanese inflation rate in the long run is somewhat surprising. It should be recalled that the GVARs were estimated on a sample starting in 1990. The period from 1990 to today is a period of generally low Japanese inflation, despite it being a period of monetary loosening, especially from the late 1990s. The reasons for low Japanese inflation are many. They include a host of phenomena associated with “secular stagnation” such as low physical and R & D investment, low TFP growth owing to complete “catch-up” with Western technology, and the rapid aging of the population. These phenomena have negatively affected Japanese consumer psychology, leading to low and downwardly rigid inflationary expectations. As in the study by Dekle and Hamada (2015), we showed that Japanese monetary expansions have not increased Japanese inflationary expectations and actual inflation rates.

In Figure 6, I depict the response of real equity prices (nominal equity prices divided by the CPI index). Equity prices of Japan, Korea, and Thailand all rise very sharply $ ^{7} $ . A
Fig.6 : One SD increase in Japanese real base money: response of real equity prices

Fig.7: One SD increase in Japanese real base money: response of long-term interest rates

one SD increase in Japanese base money increases Japanese, Korean, and Thai equity prices by 4, 3, and 2 percent respectively.

Finally, in Figure 7, I depict the response of long-term nominal interest rates to a Japanese base money shock. Long-term interest rate data are available only for Japan.
and Korea. Japanese long-term interest rates increase ever so slightly -0.0015 percent in response to a one SD increase in Japanese real base money. Korean long-term interest rates zig zag, but the effects are small. Given that the impact of Japanese monetary expansions on inflation and nominal long-term interest rates are small, the impact of the monetary expansion on real long-term interest rates are also probably small.

### 5.2 Transmission Mechanisms of Japanese Monetary Policy

Thus far, I have not elaborated on the mechanisms underlying the impact of an increase in Japanese base money on the GDPs of Japan and its neighbors (in Figure 3). The impulse responses depicted above, however, suggest that the positive transmission channel through the lowering of real long-term interest rates is probably negligible within Japan. In response to a shock to real base money, long-term interest rates in Japan actually rise (slightly) and inflation rates fall (slightly), increasing long-term real interest rates. In Korea, inflation rates rise and long-term interest rates generally decline in response to an expansion in Japanese base money, suggesting that Korean GDP may be stimulated somewhat by this decline in their long-term interest rate.

The sharp rise in equity prices in all countries in response to an increase in Japanese base money suggests that the equity channel could be important in raising Japan's GDP. As equity prices rise, the wealth of households increases and they increase their consumption, stimulating GDP. A rise in equity prices also lowers the cost of capital for firms, leading firms to invest more. Equity prices in Korea and Thailand also increase sharply in response to a rise in Japanese base money, suggesting that Japanese base money shocks may be transmitted to Korea's and Thailand's GDP through the rise in Thai and Korean equity prices $ ^{8} $ .

Finally, the fact that the Japanese yen first depreciates and then appreciates relative to the Asian currencies in response to Japanese base money shocks, implies that exchange rates could be an important conduit of Japanese quantitative easing policies on its Asian neighbors. The initial depreciation of the yen-vis-à-vis the Korean won