Comments on

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Comments on Massive Money Injection in an
Economy with Broad Liquidity Services The
Japanese Experience 2001-2005 by Mitsuru
Iwamura, Shigenori Shiratsuka and Tsutomu
WatanabeJapan Project Meeting

• John B. Taylor
• Stanford University
• 15 September 2006

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Summary

• Novel, rigorous, clear, policy-relevant
• Excellent combination of theory and emprics
• Basic idea is to add bonds to a money in the
  utility function model for a representative
  household

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Example with Specific Utility Case w/o Bonds
u(c,M/P) c-1 .0025(M/P)-1 -1 uc - c-1
.0025(M/P)-1-2 (-c -2) uz - c-1
.0025(M/P)-1-2 (-.0025)(M/P)-2 uz/uc
.0025(c/(M/P))2 r M/P .05cr-.5
Looks like standard money demand function. In the
ISW model, terms involving the the marginal
utility of bonds function will be added,
shifting money demand around.
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From Lucas, Robert E, Jr, (2000), Inflation and
Welfare, Econometrica, Vol. 68, No. 2, March,
pp. 247-274.
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From Lucas, Robert E, Jr, (2000), Inflation and
Welfare, Econometrica, Vol. 68, No. 2, March,
pp. 247-274.
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The ISW model with bonds in the utility function
breaks the standard term structure relation
Moreover, can test the model by seeing if the LST
term shows up during the massive money
injection
Futures rate
Forward rate
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Issues

• Provides a foundation for my paper on the Great
  Japanese Intervention, presented at the cabinet
  office yesterday. Thanks!
• Money injection, perhaps aided by Great
  Intervention, matters.
• How do we know M is monetary base in their model?
  
• May need both commitment to 0 (or considerable
  period at 1) plus money injections
• Specify a utility function and estimate?
• As in my example
• Could then rationalize excess money in Mihara
• Perhaps estimate relation between interest rate
  and CA
• Recently ?i .25 and ?CA 25 trillion yen
• Size of impact seems small
• 10 or 15 basis points on two and three year
  maturities