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Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?

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  • Ichiro Muto
  • Nao Sudo
  • Shunichi Yoneyama

Abstract

After the global financial crisis, slowdowns of total factor productivity (TFP), often measured as the Solow residual, have been observed across major countries. This study offers an explanation for this by focusing on Japan's financial crises during the 1990s. We first incorporate credit constraints, for financial intermediaries (FIs) and firms, and input–output structure into the standard New Keynesian model, and show that the model delivers multiple channels through which damaged balance sheets reduce measured TFP. We then estimate the model using Japanese data, and show that adverse shocks to FIs' balance sheets played a substantial role in lowering measured TFP.

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  • Ichiro Muto & Nao Sudo & Shunichi Yoneyama, 2023. "Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 159-207, February.
    • Handle: RePEc:bla:obuest:v:85:y:2023:i:1:p:159-207
    DOI: 10.1111/obes.12517
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    2. Nao Sudou, 2012. "Financial Markets, Monetary Policy and Reference Rates: Assessments in DSGE Framework," Bank of Japan Working Paper Series 12-E-12, Bank of Japan.
    3. Barry Eichengreen & Donghyun Park & Kwanho Shin, 2017. "The Global Productivity Slump: Common and Country-Specific Factors," Asian Economic Papers, MIT Press, vol. 16(3), pages 1-41, Fall.
    4. Shirai, Daichi, 2016. "Persistence and Amplification of Financial Frictions," MPRA Paper 72187, University Library of Munich, Germany.
    5. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
    6. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
    7. Kaihatsu, Sohei & Kurozumi, Takushi, 2014. "What caused Japan’s Great Stagnation in the 1990s? Evidence from an estimated DSGE model," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 217-235.
    8. Satoshi Hoshino & Daisuke Ida, 2021. "Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model," Discussion Papers 2116, Graduate School of Economics, Kobe University.
    9. Yuka Nakajima & Jun Matsushima, 2022. "Japan s Low-growth Economy from the Viewpoint of Energy Quality," International Journal of Energy Economics and Policy, Econjournals, vol. 12(1), pages 460-468.
    10. Kosuke Aoki & Naoko Hara & Maiko Koga, 2017. "Structural Reforms, Innovation and Economic Growth," Bank of Japan Working Paper Series 17-E-2, Bank of Japan.

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    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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