A peek inside the black box: The monetary transmission mechanism in Japan

This paper uses vector autoregressions to examine the monetary transmission mechanism in Japan. The empirical results indicate that both monetary poli cy and banks' balance sheets are important sources of shocks, that bunks pl ay a crucial role in transmitting monetary shocks to economic activity, tha t corporations and households have not been able to substitute borrowing fr om other sources for a shortfall in bank borrowing, and that business inves tment is especially sensitive to monetary shocks. We conclude that policy m easures to strengthen banks are probably a prerequisite to restoring the ef fectiveness of the monetary transmission mechanism.