Note 1-55

(55) According to the model used in the FY 2002 Annual Report on the Japanese Economy and Public Finance, the effect of monetary base on yen-dollar rates was statistically significant from the first quarter of 1990 to the first quarter of 2003. However, according to interval estimate conducted after checking the relation between the structural changes suggested by the cumulative sum of sequential residuals of the estimated model and the changes in monetary policies, the effect of monetary base became insignificant from the second quarter of 1995 when the call rate leveled off at around 0.4%. Although the effect became statistically significant from the first quarter of 1999 when the zero interest policy was adopted, the effect was opposite to the expected relation. At the same time, considering the problem of the sample size from using quarterly data, we estimated the monetary base parameter for the period from January 1997 to March 2003 using monthly data sets that combined monthly data and quarterly data. As a result, the effect of monetary base became meaningful and the value of the parameter was found to gradually increase in interval estimates from the time of adoption of the zero interest rate policy and the time of adoption of the quantitative easing policy. Furthermore, cumulative sum of sequential residuals of the estimated model suggested that a strong structural change was prompted by the terrorist attacks in the United States in September 2001. This may mean that the terrorist attacks in the United States and the Iraq War had impacts on the foreign exchange market trends.