Do monetary policy and cost-push shock matter? : Bank of Japan’s exit policy in 2024-2025

This paper examines how the Bank of Japan (BOJ)'s "Inflation-Overshooting Commitment" and cost-push shocks contributed to its exit from a liquidity trap during 2024-2025.To this end, we use a New Keynesian model incorporating shocks to demand and inflation, along with simple monetary policy rules.Our simulations show that such rules, especially those that maintain a zero interest rate even amid high inflation after 2021, can significantly elevate inflation.Under a price-level targeting rule, inflation exceeds 2 percent, while the average inflation targeting rule stabilizes inflation close to 2 percent over an extended period.These findings indicate that both policy commitment and cost-push shocks played a quantitative role in raising inflation and widening the output gap, ultimately facilitating the BOJ's exit policy.