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Abstract
It is known that the BOJ's Credit Rationing has been the most important measure to control the money supply in the Japanese monetary transmission mechanism. However, the recent innovation of money markets has also significantly influenced behaviors of banks and the non-bank public and, in turn, the money supply in a potent fashion. This paper presents a money market model in which money market innovations are taken into account with the BOJ's credit rationing, which enables us to analyze the determination of the money supply. In the short run, the Bank of Japan has used the restriction of BOJ loans along with the restriction of the expansion of lending by banks to try to control the money supply. However, the development of money market brought less dependence of banks and the public on the Bank of Japan so that the Bank of Japan's credit rationing is of limited usefulness as a monetary policy measure. The implications of these recent developments in money markets for policy makers are examined here.
