Empirical analysis of the exchange rate channel in Japan

This paper analyzes the significance of the exchange rate channel, one of the transmission mechanisms of monetary policy. It is important to evaluate this channel for Japan because yen depreciation has been proposed as a policy to move the economy out of a liquidity trap. Our results suggest that, in the past, monetary expansion resulted in yen depreciation in the long- and short-run. However, there is no evidence to support the view that yen depreciation facilitated economic growth. Therefore, we conclude that use of the exchange rate as a mechanism to boost the real economy was, in our sample period at least, premature.