Identifying the Effect of the Bank of Japan's Liquidity Facilities: The Case of Commercial Paper Operations During the Financial Turmoil

How do we evaluate the effects of unconventional monetary policy measures? To answer this question, we propose a simple structural model that enables us to identify the effects of liquidity facilities during financial turmoil. Specifically, we develop a model that examines the effects of the Bank of Japan's (BoJ's) commercial paper (CP) operations on the CP primary market. On the basis of the structural model, we measure the effects of CP operations as differences between the actual rates in the primary market and the counterfactual rates without the operations, and decompose the effects into three factors. We apply our model to identifying the effects of CP operations from October 2008 to May 2009, including the period after the BoJ introduced the outright purchase of CP and its special funds-supplying operation accepting CPs as collateral in addition to the CP repo operation. Our results suggest that the CP repo operation and the outright purchase of CP had marked effects initially; however, these effects were subdued subsequently. Moreover, the effects of the special funds-supplying operation were substantial and persistent from January to April 2009.