## 1. Comparison Across Different Scenarios.

## Source details

**Canonical URL:** [1. Comparison Across Different Scenarios.](https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019229-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2019/wpiea2019229-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2019/wpiea2019229-print-pdf.pdf.json)

---

### FPAS / QPM framework for Japan — key features
- Framework: Forecasting and Policy Analysis System (FPAS) using a Quarterly Projection Model (QPM) — a forward-looking open-economy calibrated gap model in the New-Keynesian tradition with ad-hoc extensions to replicate Japan-specific stylized facts.
- Japan-specific features:
  - Endogenous central bank credibility (credibility stock between 0 and 1 that conditions formation of inflation expectations).
  - Effective lower bound (ELB) constraint on the nominal policy rate.
  - Simplified fiscal sector with fiscal impulse feeding into aggregate demand.
  - Decomposition of headline inflation into core, energy, and fresh food components.
- Expectations formation:
  - Credibility-weighted inflation expectations evolve between forward-looking model-consistent expectations and backward-looking past inflation, with an expectations “bias” term that is zero when credibility = 1 and negative otherwise.
  - Credibility stock evolves as an AR(1) driven by a credibility signal inferred from past ability to hit the inflation target.
- Monetary policy:
  - Policy rate either follows a Taylor-type rule (unconstrained rate) or equals an effective lower bound floor (ELB), implemented via the model’s equations.
  - Unconstrained rate reacts to expected inflation deviation from target and output gap, with persistence (policy smoothing) and discretionary shock component.
- Fiscal block:
  - Debt dynamics captured with debt-to-GDP ratio equation and three fiscal decisions: path for debt target, level of structural deficit, and discretionary changes in overall deficit.
  - Fiscal impulse is defined as the sum of discretionary components and enters the IS curve.

### Baseline projections and central quantitative results
- Baseline assumptions:
  - Central bank with imperfect credibility.
  - Fiscal policy reactions limited to fiscal impulse only; no role for structural reforms.
- Baseline projection outcomes (medium-term, ending 2023Q4 unless stated otherwise):
  - Headline and core inflation gradually rise toward the target but remain below the 2 percent target under baseline.
  - Probability measures (fan-chart results):
    - Probability of headline CPI inflation reaching the 2 percent target in 2023Q4: 37.3 (in percent).
    - Probability of core inflation reaching the 2 percent target in 2023Q4: 35.5 (in percent).
    - Probability of headline inflation being negative in 2023Q4: 35.2 (in percent).
    - Probability of core inflation being negative in 2023Q4: 34.5 (in percent).
  - Short-run likelihood (end-2019Q4):
    - 16 (in percent) chance headline CPI will reach 2 percent.
    - 6 (in percent) chance for core inflation to reach 2 percent.
  - Monetary stance:
    - Accommodative monetary policy required to keep real interest rate below zero and to sustain a positive output gap.
    - Nominal policy rate remains at ELB for several quarters in baseline before conditions allow increases.
- Drivers of inflation in baseline:
  - Increase in headline inflation driven mainly by rise in core inflation; food and energy contributions assumed roughly constant on average over projection horizon.
  - Core inflation driven by real marginal costs proxied by output gap and real effective exchange rate gap; accumulation of credibility stock helps recovery of inflation expectations.

### Scenario analysis — probabilities and comparative outcomes
- Four alternative scenarios (all with fiscal policy limited to fiscal impulse):
  1. Scenario 1 — Perfect Credibility (central bank perfectly credible).
  2. Scenario 2 — Baseline + temporary sharp increase in sovereign risk premium.
  3. Scenario 3 — Baseline + temporary sharp appreciation of the Japanese yen.
  4. Scenario 4 — Baseline + temporary decrease in world oil prices.
- Probability of headline inflation reaching the 2 percent target in 2023Q4 (in percent):
  - Baseline 37.3
  - Scenario 1. Perfect Credibility 43.6
  - Scenario 2. Baseline + Sovereign Risk Premium 33.3
  - Scenario 3. Baseline + Yen Appreciation 32.1
  - Scenario 4. Baseline + Low Oil Price Shock 33.1
- Probability of core inflation reaching the 2 percent target in 2023Q4 (in percent):
  - Baseline 35.5
  - Scenario 1. Perfect Credibility 45.2
  - Scenario 2. Baseline + Sovereign Risk Premium 35.5
  - Scenario 3. Baseline + Yen Appreciation 33.9
  - Scenario 4. Baseline + Low Oil Price Shock 32.9
- Probability of headline inflation being negative in 2023Q4 (in percent):
  - Baseline 35.2
  - Scenario 1. Perfect Credibility 27.1
  - Scenario 2. Baseline + Sovereign Risk Premium 39.7
  - Scenario 3. Baseline + Yen Appreciation 41.2
  - Scenario 4. Baseline + Low Oil Price Shock 36.4
- Probability of core inflation being negative in 2023Q4 (in percent):
  - Baseline 34.5
  - Scenario 1. Perfect Credibility 27.1
  - Scenario 2. Baseline + Sovereign Risk Premium 40.1
  - Scenario 3. Baseline + Yen Appreciation 41.7
  - Scenario 4. Baseline + Low Oil Price Shock 36.5
- Scenario insights:
  - Perfect credibility materially increases the probability of reaching the 2 percent target (headline: 43.6 (in percent); core: 45.2 (in percent)) and reduces probability of deflation (headline negative: 27.1 (in percent); core negative: 27.1 (in percent)).
  - Adverse shocks (sovereign risk premium, yen appreciation, low oil price) reduce the likelihood of achieving the target (all below the baseline 37.3 (in percent) for headline) and raise the likelihood of deflation.
  - With a perfectly credible central bank, smaller output gap accommodation is required to generate a given likelihood of achieving the inflation target compared with an imperfectly credible central bank.

### Model dynamics and illustrative impulse responses
- Cost-push shock (one percent core inflation cost-push shock):
  - Normal times: central bank raises policy rate; currency appreciates; output falls; inflationary effects dissipate within about eight quarters.
  - At ELB with inflation below target: central bank accommodates; policy rate remains at ELB longer; inflation effects persist and can lead to earlier exit from ELB relative to benchmark.
- Temporary negative oil price shock (world oil prices drop by ten percent):
  - Immediate decline in domestic energy prices and downward pressure on headline inflation and inflation expectations.
  - Normal times: central bank cuts policy rate to re-anchor expectations; demand and weaker exchange rate stimulate inflation recovery.
  - At ELB: policy constrained, declines in inflation and expectations persist longer; permanent lower inflation on forecast horizon compared to benchmark; ELB exit delayed.
- Discretionary fiscal impulse (increase structural deficit by one percentage point of GDP):
  - Stimulates aggregate demand and inflation.
  - Normal times: central bank tightens to anchor inflation expectations; system stabilizes.
  - At ELB: policy rate unchanged, fiscal stimulus has larger and more prolonged demand effects and can enable earlier exit from ELB relative to benchmark.

### Policy implications and recommendations
- Monetary policy alone is unlikely to guarantee achievement of the 2 percent inflation target under baseline and adverse scenarios; accommodative monetary stance is necessary but not sufficient.
- Recommended comprehensive policy package to increase likelihood of reaching target:
  - Coordination between monetary, fiscal, and structural policies.
  - Structural reforms to boost growth and productivity in the face of adverse demographic trends (official projections: population will age and shrink by over 25 percent in the next 40 years).
- Strengthening central bank credibility is crucial to raising the probability of achieving the inflation target. Options discussed include:
  - Ensuring policy framework is flexible and sustainable to mitigate risks from prolonged accommodation (side-effects, competing objectives).
  - Strengthening communication: publishing BoJ staff baseline forecast with confidence bands and underlying assumptions could improve transparency and expectations formation.
- Operational implication:
  - If initial credibility is low and credibility persistence is high, monetary policy needs to be relatively more aggressive to achieve inflation objective than when initial credibility is higher.

### Conclusion — core messages
- Despite Abenomics-era policies, Japan faces a prolonged period of low inflation and low inflation expectations; achieving a 2 percent CPI inflation target over the medium term remains challenging.
- FPAS/QPM analysis with ELB and endogenous credibility shows:
  - Under baseline (imperfect credibility), probability of reaching headline 2 percent by 2023Q4 is 37.3 (in percent); core 35.5 (in percent).
  - Perfect credibility raises those probabilities (headline 43.6 (in percent); core 45.2 (in percent)).
  - Adverse shocks reduce probabilities and increase deflation risks.
- Policy conclusion: accommodative monetary policy is required to sustain a positive output gap and negative real interest rates, but coordination with fiscal policy and structural reforms and improvements in central bank credibility and communication are important to materially increase the chance of achieving the inflation target.

### Appendix I — Evolution of the Bank of Japan’s Monetary Policy During Abenomics
- Timeline: Monetary Policy Framework
  - January 2013: Price Stability Target of 2 percent
  - April 2013: Qualitative and Quantitative Easing (QQE) with annual JGB purchases of ¥40 trillion
  - October 2014: Qualitative and Quantitative Easing (QQE) with annual JGB purchases of ¥80 trillion
  - January 2016: Introducing Negative Interest Rate Policy
  - September 2016: QQE with Yield Curve Control, Inflation-Overshooting Commitment
- Key policy statements (selected quotations preserved)
  - January 22, 2013: Sets the “price stability target” at 2 percent in terms of the year on-year rate of change in the consumer price index (CPI).
  - April 4, 2013: The Bank will achieve the price stability target of 2 percent … with a time horizon of about two years.
  - October 31, 2014: The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).
  - January 29, 2016: The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank; adopt a three-tier system with positive, zero, or negative interest rates applied to tiers.
  - September 21, 2016: Introduces "QQE with Yield Curve Control" composed of (1) yield curve control and (2) an "inflation-overshooting commitment" to expand the monetary base until CPI inflation exceeds 2 percent and stays above the target in a stable manner.

### Appendix II — Calibration of Parameters (model estimates and parameter values)
- Aggregate Demand (output gap equation and real monetary conditions index)
  - Parameter Estimates:
    - 훽1 = 0.3
    - 훽2 = 0.15
    - 훽3 = 0.55
    - 훽4 = 0.8
    - 훽5 = 0.5
    - λ ≈0.82
  - Interpretation notes:
    - The effectiveness of monetary policy is shown by 훽3 * λ; for Japan this first estimate is around 0.45.
    - The openness of the economy is reflected in (−훽3 * (1−λ)); for Japan this latter is around -0.1.
- Okun’s Law
  - Parameter Estimates:
    - 훾1 = 0.7
    - 훾2 = 0.05
- Phillips Curve (multiple inflation equations preserved symbolically)
  - Parameter Estimates:
    - 훼ccccc (α for core inflation lag) = 0.6
    - 훼2 = 0.07
    - 훼3 = 0.12
    - 훼crrc (α for core real rate component) ≈0.42
    - 훼cee = 0.2
    - 훼4 = 0.3
    - 훼5 = 0.2
    - 훼ffff = 0.05
    - 훼6 = 0.2
    - 훼7 = 0.05
- Central Bank Credibility
  - Parameter Estimates:
    - 훼cccccccc (persistence of credibility) = 0.85
    - 훽cssyss (mapping from credibility and observed inflation to belief shocks) = 0.3
- Uncovered Interest Parity Conditions
  - Parameter Estimates:
    - 훼UUOO UU = 0.85
- Fiscal Sector
  - Parameter Estimates:
    - RRfssrrff = 0.1

*Source: IMF staff paper — “1. Comparison Across Different Scenarios.” (extracted from the wpiea2019229-print-pdf chapter content supplied).*

### References _____________________________________________________________________ 31

### References

### Figures
- 1. Impulse Response Functions in Response to a Cost-push Shock __________________________ 18
- 2. Impulse Response Functions in Response to a Negative Oil Price Shock ___________________ 19
- 3. Impulse Response Functions in Response to a Discretionary Fiscal Impulse_________________ 20
- 4. Baseline Projections for CPI Inflation and Real GDP Growth____________________________ 21
- 5. Baseline Projections for Real GDP and Real Output Gap _______________________________ 22
- 6. Composition of Real Output Gap __________________________________________________ 22
- 7. Baseline: Composition of Headline Inflation _________________________________________ 23
- 8. Baseline: Decomposition of Core Inflation  __________________________________________ 23
- 9. Baseline: Nominal and Real Interest Rate  ___________________________________________ 24
- 10. Baseline: Fan Charts for Headline and Core CPI Inflation  _____________________________ 25
- 11. Baseline: Fan Charts for Real GDP Growth and Unemployment Rate ____________________ 25
- 12. Comparison of Scenarios: Credible vs. Imperfectly Credible Central Bank  ________________ 27

### Tables
- No table entries are listed in the supplied content.

*Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019229-print-pdf.pdf*

### 1. Comparison Across Different Scenarios. ____________________________________________ 28

### 1. Comparison Across Different Scenarios.

### FPAS / QPM framework for Japan — key features
- Framework: Forecasting and Policy Analysis System (FPAS) using a Quarterly Projection Model (QPM) — a forward-looking open-economy calibrated gap model in the New-Keynesian tradition with ad-hoc extensions to replicate Japan-specific stylized facts.
- Japan-specific features introduced:
  - Endogenous central bank credibility (credibility stock between 0 and 1 that conditions formation of inflation expectations).
  - Effective lower bound (ELB) constraint on the nominal policy rate.
  - Simplified fiscal sector with fiscal impulse feeding into aggregate demand.
  - Decomposition of headline inflation into core, energy, and fresh food components.
- Expectations formation:
  - Credibility-weighted inflation expectations evolve between forward-looking model-consistent expectations and backward-looking past inflation, with an expectations “bias” term that is zero when credibility = 1 and negative otherwise.
  - Credibility stock evolves as an AR(1) driven by a credibility signal inferred from past ability to hit the inflation target.
- Monetary policy:
  - Policy rate either follows a Taylor-type rule (unconstrained rate) or equals an effective lower bound floor (ELB), implemented via the model’s equations.
  - Unconstrained rate reacts to expected inflation deviation from target and output gap, with persistence (policy smoothing) and discretionary shock component.
- Fiscal block:
  - Debt dynamics captured with debt-to-GDP ratio equation and three fiscal decisions: path for debt target, level of structural deficit, and discretionary changes in overall deficit.
  - Fiscal impulse is defined as the sum of discretionary components and enters the IS curve.

### Baseline projections and central quantitative results
- Baseline assumptions:
  - Central bank with imperfect credibility.
  - Fiscal policy reactions limited to fiscal impulse only; no role for structural reforms.
- Baseline projection outcomes (medium-term, ending 2023Q4 unless stated otherwise):
  - Headline and core inflation gradually rise toward the target but remain below the 2 percent target under baseline.
  - Probability measures (fan-chart results):
    - Probability of headline CPI inflation reaching the 2 percent target in 2023Q4: 37.3 (in percent).
    - Probability of core inflation reaching the 2 percent target in 2023Q4: 35.5 (in percent).
    - Probability of headline inflation being negative in 2023Q4: 35.2 (in percent).
    - Probability of core inflation being negative in 2023Q4: 34.5 (in percent).
  - Short-run likelihood (end-2019Q4): 16 (in percent) chance headline CPI will reach 2 percent; 6 (in percent) for core inflation.
  - Monetary stance: accommodative monetary policy required to keep real interest rate below zero and to sustain a positive output gap; nominal policy rate remains at ELB for several quarters in baseline before conditions allow increases.
- Drivers of inflation in baseline:
  - Increase in headline inflation driven mainly by rise in core inflation; food and energy contributions assumed roughly constant on average over projection horizon.
  - Core inflation driven by real marginal costs proxied by output gap and real effective exchange rate gap; accumulation of credibility stock helps recovery of inflation expectations.

### Scenario analysis — probabilities and comparative outcomes
- Four alternative scenarios (all with fiscal policy limited to fiscal impulse):
  1. Scenario 1 — Perfect Credibility (central bank perfectly credible).
  2. Scenario 2 — Baseline + temporary sharp increase in sovereign risk premium.
  3. Scenario 3 — Baseline + temporary sharp appreciation of the Japanese yen.
  4. Scenario 4 — Baseline + temporary decrease in world oil prices.
- Key comparative probabilities (Probability values preserved exactly):
  - Probability of headline inflation reaching the 2 percent target in 2023Q4 (in percent):
    - Baseline 37.3
    - Scenario 1. Perfect Credibility 43.6
    - Scenario 2. Baseline + Sovereign Risk Premium 33.3
    - Scenario 3. Baseline + Yen Appreciation 32.1
    - Scenario 4. Baseline + Low Oil Price Shock 33.1
  - Probability of core inflation reaching the 2 percent target in 2023Q4 (in percent):
    - Baseline 35.5
    - Scenario 1. Perfect Credibility 45.2
    - Scenario 2. Baseline + Sovereign Risk Premium 35.5
    - Scenario 3. Baseline + Yen Appreciation 33.9
    - Scenario 4. Baseline + Low Oil Price Shock 32.9
  - Probability of headline inflation being negative in 2023Q4 (in percent):
    - Baseline 35.2
    - Scenario 1. Perfect Credibility 27.1
    - Scenario 2. Baseline + Sovereign Risk Premium 39.7
    - Scenario 3. Baseline + Yen Appreciation 41.2
    - Scenario 4. Baseline + Low Oil Price Shock 36.4
  - Probability of core inflation being negative in 2023Q4 (in percent):
    - Baseline 34.5
    - Scenario 1. Perfect Credibility 27.1
    - Scenario 2. Baseline + Sovereign Risk Premium 40.1
    - Scenario 3. Baseline + Yen Appreciation 41.7
    - Scenario 4. Baseline + Low Oil Price Shock 36.5
- Scenario insights:
  - Perfect credibility materially increases the probability of reaching the 2 percent target (headline: 43.6 (in percent); core: 45.2 (in percent)) and reduces probability of deflation (headline negative: 27.1 (in percent); core negative: 27.1 (in percent)).
  - Adverse shocks (sovereign risk premium, yen appreciation, low oil price) reduce the likelihood of achieving the target (all below the baseline 37.3 (in percent) for headline) and raise the likelihood of deflation.
  - With a perfectly credible central bank, smaller output gap accommodation is required to generate a given likelihood of achieving the inflation target compared with an imperfectly credible central bank.

### Model dynamics and illustrative impulse responses
- Cost-push shock (one percent core inflation cost-push shock):
  - Normal times: central bank raises policy rate; currency appreciates; output falls; inflationary effects dissipate within about eight quarters.
  - At ELB with inflation below target: central bank accommodates; policy rate remains at ELB longer; inflation effects persist and can lead to earlier exit from ELB relative to benchmark.
- Temporary negative oil price shock (world oil prices drop by ten percent):
  - Immediate decline in domestic energy prices and downward pressure on headline inflation and inflation expectations.
  - Normal times: central bank cuts policy rate to re-anchor expectations; demand and weaker exchange rate stimulate inflation recovery.
  - At ELB: policy constrained, declines in inflation and expectations persist longer; permanent lower inflation on forecast horizon compared to benchmark; ELB exit delayed.
- Discretionary fiscal impulse (increase structural deficit by one percentage point of GDP):
  - Stimulates aggregate demand and inflation.
  - Normal times: central bank tightens to anchor inflation expectations; system stabilizes.
  - At ELB: policy rate unchanged, fiscal stimulus has larger and more prolonged demand effects and can enable earlier exit from ELB relative to benchmark.

### Policy implications and recommendations (from analysis)
- Monetary policy alone is unlikely to guarantee achievement of the 2 percent inflation target under baseline and adverse scenarios; accommodative monetary stance is necessary but not sufficient.
- A comprehensive policy package is recommended to increase likelihood of reaching target, encompassing:
  - Coordination between monetary, fiscal, and structural policies.
  - Structural reforms to boost growth and productivity in the face of adverse demographic trends (official projections: population will age and shrink by over 25 percent in the next 40 years).
- Strengthening central bank credibility is crucial to raising the probability of achieving the inflation target. Options discussed include:
  - Ensuring policy framework is flexible and sustainable to mitigate risks from prolonged accommodation (side-effects, competing objectives).
  - Strengthening communication: publishing BoJ staff baseline forecast with confidence bands and underlying assumptions could improve transparency and expectations formation.
- Operational implication: if initial credibility is low and credibility persistence is high, monetary policy needs to be relatively more aggressive to achieve inflation objective than when initial credibility is higher.

### Conclusion — core messages
- Despite Abenomics-era policies, Japan faces a prolonged period of low inflation and low inflation expectations; achieving a 2 percent CPI inflation target over the medium term remains challenging.
- FPAS/QPM analysis with ELB and endogenous credibility shows:
  - Under baseline (imperfect credibility), probability of reaching headline 2 percent by 2023Q4 is 37.3 (in percent); core 35.5 (in percent).
  - Perfect credibility raises those probabilities (headline 43.6 (in percent); core 45.2 (in percent)).
  - Adverse shocks reduce probabilities and increase deflation risks.
- Policy conclusion: accommodative monetary policy is required to sustain a positive output gap and negative real interest rates, but coordination with fiscal policy and structural reforms and improvements in central bank credibility and communication are important to materially increase the chance of achieving the inflation target.

*Source: IMF staff paper — “1. Comparison Across Different Scenarios.” (extracted from the wpiea2019229-print-pdf chapter content supplied).*

### References

### wpiea2019229-print-pdf - References

### References (selected works cited)
- Alichi, Ali; Huigan Chen; Kevin Clinton; Charles Freedman; Marianne Johnson; Ondra Kamenik; Turgut Kisinbay; Douglas Laxton, 2009, “Inflation Targeting Under Imperfect Policy Credibility,” IMF Working Paper 09/94.
- Amarasekara, C.; Anand, R.; Ehelepola, K.; Ekanayake, H.; Jayawickrema, V.; Jegajeevan, S.; Kober, C.; Nugawela, T.; Plotnikov, S.; Remo, A.; Venuganan, P.; Yatigammana, R., 2018, An Open Economy Quarterly Projection Model for Sri Lanka. Staff Studies, 48(1), pp.21–66.
- Anand, Rahul; Ding Ding; Volodymyr Tulin, 2014, “Food Inflation in India: The Role for Monetary Policy,” IMF Working Paper 14/178.
- Argov, Eyal; David Rose; Philippe D. Karam; Natan P. Epstein; Douglas Laxton, 2007, “Endogenous Monetary Policy Credibility in a Small Macro Model of Israel,” IMF Working Paper 07/207.
- Benes, Jaromir; Kevin Clinton; Asish George; Pranav Gupta; Joice John; Ondra Kamenik; Douglas Laxton; Pratik Mitra; G.V.Nadhanael; Rafael Portillo; Hou Wang; Fan Zhang, 2017, “Quarterly Projection Model for India: Key Elements and Properties,” IMF Working Paper 17/33.
- Berg, Andrew; Philippe D. Karam; Douglas Laxton, 2006a, “A Practical Model-Based Approach to Monetary Policy Analysis, Overview,” IMF Working Paper 06/080.
- Berg, Andrew; Philippe D. Karam; Douglas Laxton, 2006b, “Practical Model-Based Monetary Policy Analysis -A How-to Guide,” IMF Working Paper 06/081.
- Blix, Marten; Peter Sellin, 1998. “Uncertainty Bands for Inflation Forecasts,” Sveriges Riksbank Working Paper No. 65.
- Byron Botha; Shaun de Jager; Franz Ruch; Rudi Steinbach, 2017. "The Quarterly Projection Model of the SARB," Working Papers 8000, South African Reserve Bank.
- Chen, Huigang; Kevin Clinton; Marianne Johnson; Ondra Kamenik; Douglas Laxton, 2009, “Constructing Forecast Confidence Bands During the Financial Crisis,” IMF Working Paper 09/214.
- Colacelli, Mariana; Emilio Fernandez-Corugedo, 2018, “Macroeconomic Effects of Japan’s Demographics: Can Structural Reforms Reverse Them?” IMF Working Paper 18/248.
- Coats, Warren; Douglas Laxton; David Rose, 2003, The Czech National Bank’s Forecasting and Policy Analysis System (Prague: Czech National Bank).
- Fuhrer, Jeffery; Glenn Rudebusch, 2004, “Estimating the Euler Equation for Output,” Journal of Monetary Economics, Vol 51 (6), pp. 1133-1153.
- Fuhrer, Jeffrey, 2017. “Expectations as a Source of Macroeconomic Persistence: Evidence from Survey Expectations in a Dynamic Macro Model,” Journal of Monetary Economics, Vol. 86, pp. 22-35.
- Garin, J. R.; Lester; E. Sims, 2019. “Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP data,” Review of Economics and Statistics, Vol 101 (1), pp.160-175.
- Goodhart, Charles; Boris Hofmann, 2005, “The IS Curve and the Transmission of Monetary Policy: is there a puzzle?” Applied Economics, Vol 37(1), pp. 29-36.
- Hirakata, N.; K. Kan; A. Kanafuji; Y. Kido; Y. Kishaba; T. Murakoshi; T. Shinohara, 2019, “The Quarterly Japanese Economic Model (Q-JEM): 2019 veresion,” Bank of Japan Working Paper Series, No. 19-E-7.
- Hong, Gee Hee; John Kandrac, 2018, “How Banks React to Negative Rates: Early Evidence from Japan” IMF Working Paper 18/11.
- International Monetary Fund, 2013–2018, Japan: Article IV Consultation, IMF Country Reports 13/253; 14/236; 15/197; 16/267; 17/242; 18/333.
- Kaihatsu, Sohei; Jouchi Nakajima, 2015, “Has Trend Inflation Shifted? An Empirical Analysis with a Regime-Switching Model,” Bank of Japan Working Paper Series No. 15-E-3.
- Kamada, Koichiro; Jouchi Nakamura; Shusaku Nishiguchi, 2015, “Are Household Inflation Expectations Anchored in Japan?” Bank of Japan Working Paper Series No. 15-E-8.
- Kanna, Prakash; Selim Elekdag, 2009, “Incorporating Market Information into the Construction of the Fan Chart,” IMF Working Paper 09/178.
- Nakazono, Yoshiyuki, 2016, “Inflation Expectations and Monetary Under Disagreements,” Bank of Japan Working Paper Series, 16-E-1.
- Obstfeld, Maurice; Kevin Clinton; Ondra Kamenik; Douglas Laxton; Yulia Ustyugova; Hou Wang, 2016, “How to Improve Inflation Targeting in Canada,” IMF Working Paper 16/192.
- Razi, Ahmad; P Ling Loke, 2017, “Fan Chart: The art and science of communicating uncertainty,” IFC Bulletins chapters, Volume 43, Bank for International Settlements.
- Svensson, Lars, 2014, “Forward Guidance,” NBER Working Paper Series No. 20796.
- Wieland, Johannes, 2019, “Are Negative Supply Shocks Expansionary at the Zero Lower Bound?” Journal of Political Economy, 127 (3), pp. 973-1007.

### Appendix I — Evolution of the Bank of Japan’s Monetary Policy During Abenomics
- Timeline: Monetary Policy Framework
  - January 2013: Price Stability Target of 2 percent
  - April 2013: Qualitative and Quantitative Easing (QQE) with annual JGB purchases of ¥40 trillion
  - October 2014: Qualitative and Quantitative Easing (QQE) with annual JGB purchases of ¥80 trillion
  - January 2016: Introducing Negative Interest Rate Policy
  - September 2016: QQE with Yield Curve Control, Inflation-Overshooting Commitment

- Key policy statements (selected quotations preserved)
  - January 22, 2013: Sets the “price stability target” at 2 percent in terms of the year on-year rate of change in the consumer price index (CPI).
  - April 4, 2013: The Bank will achieve the price stability target of 2 percent … with a time horizon of about two years.
  - October 31, 2014: The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).
  - January 29, 2016: The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank; adopt a three-tier system with positive, zero, or negative interest rates applied to tiers.
  - September 21, 2016: Introduces "QQE with Yield Curve Control" composed of (1) yield curve control and (2) an "inflation-overshooting commitment" to expand the monetary base until CPI inflation exceeds 2 percent and stays above the target in a stable manner.

### Appendix II — Calibration of Parameters (model estimates and parameter values)

- Aggregate Demand (output gap equation and real monetary conditions index)
  - Equation form preserved as in source (variables shown symbolically).
  - Parameter Estimates:
    - 훽1 = 0.3
    - 훽2 = 0.15
    - 훽3 = 0.55
    - 훽4 = 0.8
    - 훽5 = 0.5
    - λ ≈0.82
  - Interpretation notes (as stated):
    - The effectiveness of monetary policy is shown by 훽3 * λ; for Japan this first estimate is around 0.45.
    - The openness of the economy is reflected in (−훽3 * (1−λ)); for Japan this latter is around -0.1.

- Okun’s Law
  - Equation form preserved as in source.
  - Parameter Estimates:
    - 훾1 = 0.7
    - 훾2 = 0.05

- Phillips Curve (multiple inflation equations preserved symbolically)
  - Parameter Estimates:
    - 훼ccccc (α for core inflation lag) = 0.6
    - 훼2 = 0.07
    - 훼3 = 0.12
    - 훼crrc (α for core real rate component) ≈0.42
    - 훼cee = 0.2
    - 훼4 = 0.3
    - 훼5 = 0.2
    - 훼ffff = 0.05
    - 훼6 = 0.2
    - 훼7 = 0.05

- Central Bank Credibility (credibility-building mechanism equations preserved symbolically)
  - Parameter Estimates:
    - 훼cccccccc (persistence of credibility) = 0.85
    - 훽cssyss (mapping from credibility and observed inflation to belief shocks) = 0.3

- Uncovered Interest Parity Conditions
  - Equation form preserved as in source.
  - Parameter Estimates:
    - 훼UUOO UU = 0.85

- Fiscal Sector
  - Fiscal shock specification preserved symbolically.
  - Parameter Estimates:
    - RRfssrrff = 0.1

*Source: wpiea2019229-print-pdf - References (extracted sections: References; Appendix I; Appendix II).*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019229-print-pdf.pdf_