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What causes business cycles? Analysis of the Japanese industrial production data

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  • Iyetomi, Hiroshi
  • Nakayama, Yasuhiro
  • Yoshikawa, Hiroshi
  • Aoyama, Hideaki
  • Fujiwara, Yoshi
  • Ikeda, Yuichi
  • Souma, Wataru
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    Abstract

    We explore what causes business cycles by analyzing the Japanese industrial production data. The methods used are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant. Taking advantage of the information revealed by disaggregated data, we identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We also demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model holds up even under the 2008-2009 recession. Because a fall of output during 2008-2009 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

    Volume (Year): 25 (2011)
    Issue (Month): 3 (September)
    Pages: 246-272

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    Handle: RePEc:eee:jjieco:v:25:y:2011:i:3:p:246-272

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    Web page: http://www.elsevier.com/locate/inca/622903

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    8. Ramey, Valerie A & Francis, Neville, 2002. "Is The Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisted," University of California at San Diego, Economics Working Paper Series qt6x80k3nx, Department of Economics, UC San Diego.
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    Cited by:
    1. Muto, Ichiro & Kumano, Yusuke & Nakano, Akihiro, 2013. "What explains the recent fluctuations in Japan's output? A structural factor analysis of Japan's industrial production," MPRA Paper 48615, University Library of Munich, Germany.

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