Monetary Policy and Portfolio Behaviour in Japan: a Disequilibrium Analysis. (Volumes I and II) (Macroeconomics).

Monetary policy in Japan has been regarded as the most important tool of macroeconomic policy in the postwar period. While its stabilisation record has been disputed it is usually regarded as having been easy to implement and quick to take effect. Japan's financial institutions, particularly control of the central bank's lending to banks and restrictions on loan interest rates, which resulted in credit rationing, were seen as central to the operation of monetary policy until the 1970s. Research on Japan's monetary policy has tended, however, to consider the nature and use of particular policy tools in isolation, or to analyse individual financial markets separately. There have been relatively few attempts to analyse an integrated financial framework and to examine the effects of monetary policy changes in such a framework. This dissertation develops a synthesis of a portfolio balance model and the methods of disequilibrium economics to consider the effect of credit rationing on behavior in other financial markets. It uses that model to analyse the policy problems faced by a monetary authority attempting to control private liabilities (credit) by controlling central bank credit to the banking system. The model shows that in the presence of credit rationing credit-paradigm monetary authorities may face a trade-off between the ability to control domestic financial aggregates (credit or M1) and foreign borrowing. The dissertation adapts the theoretical model for empirical application and uses Flow of Funds data from 1965-73 to estimate both rationed and non-rationed versions of the portfolio model. Full specification tests are not carried out because of the model's complexity but conformity with theoretical requirements and Chow tests reject the non-rationed model. The results of the rationed model suggest that interest rate controls supported direct control of domestic credit and the money supply. Foreign capital flows, however, were unlikely to have undermined policy and the need for monetary-policy-supporting capital controls is not clearly supported.PhDFinanceUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/161228/1/8702712.pd