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Letting the speculative and the news views of the Japanese business cycle compete

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  • Lilia Karnizova

    ()
    (University of Ottawa)

Abstract

This note uses a dynamic stochastic general equilibrium model with direct preferences for financial wealth to explore how stock price booms and busts relate to the real side of the economy. It evaluates the 'speculative' (sunspots) and 'news' (anticipated future changes in productivity) explanations of the Japanese stock market bubble and economic business cycle in 1986-1999. Depending on parameter configurations, the model yields either a unique equilibrium or multiple equilibria. The note calibrates two versions of the model: (i) a version with multiple equilibria, driven solely by sunspot shocks, and (ii) a version with a unique equilibrium, driven by surprise and news shocks to productivity. In both cases, expectations shocks are estimated to perfectly match the historical path of the Nikkei stock market average. Simulation results show that, from the perspective of the model, both the speculative and the news views can explain equally well empirical investment. The two views, however, differ in their predictions for consumption, output and real wages. These differences could be explored in further work on disentangling empirical importance of sunspot and news shocks.

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File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I2-P108.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 33 (2013)
Issue (Month): 2 ()
Pages: 1146-1158

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Handle: RePEc:ebl:ecbull:eb-12-00621

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Related research

Keywords: sunspots; news shocks; Japanese economy; business cycles; stock market; expectations; speculations; bubbles; investment;

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References

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  1. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
  2. Fumio Hayashi & Edward C. Prescott, 2002. "The 1990s in Japan: A Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January.
  3. Sainan Jin & Wanjun Jiang & Liangjun Su & Jianying Hu, 2006. "The Rise in House Prices in China: Bubbles or Fundamentals?," Economics Bulletin, AccessEcon, vol. 3(7), pages 1-8.
  4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  5. Paul Beaudry & Franck Portier, 2005. "The "News" View of Economic Fluctuations: Evidence from Aggregate Japanese Data and Sectoral U.S. Data," NBER Working Papers 11496, National Bureau of Economic Research, Inc.
  6. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," IDEI Working Papers 158, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Ellen R. McGrattan & Edward C. Prescott, 2009. "Unmeasured investment and the puzzling U.S. boom in the 1990s," Staff Report 369, Federal Reserve Bank of Minneapolis.
  8. Lilia Karnizova, 2012. "News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle," Working Papers 1201E, University of Ottawa, Department of Economics.
  9. Tomoyuki Nakajima, 2003. "Sunspot Fluctuations in Asset Prices and Business Cycles in Japan Over 1986-1999," The Japanese Economic Review, Japanese Economic Association, vol. 54(3), pages 253-274.
  10. repec:ebl:ecbull:v:3:y:2006:i:7:p:1-8 is not listed on IDEAS
  11. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Levine's Working Paper Archive 122247000000002352, David K. Levine.
  12. Xiao Wei, 2004. "Explaining Speculative Expansions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-32, August.
  13. Lilia Karnizova, 2008. "The Spirit of Capitalism and Expectation Driven Business Cycles," Working Papers 0804E, University of Ottawa, Department of Economics.
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Cited by:
  1. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.

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