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Monetary Implications of the Hayashi-Prescott Hypothesis for Japan

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  • Andolfatto, David

    (Simon Fraser U and Federal Reserve Bank of Cleveland)

Abstract

Hayashi and Prescott speculate that the anemic performance of the Japanese economy since the early 1990s can be understood in terms of how any "well functioning" private sector might react to an exogenous productivity shock. In particular, they downplay the role of monetary and financial factors in shaping Japan's "lost decade." But many view the monetary and financial developments in Japan as direct evidence of a " malfunctioning" financial sector: These developments include a steady decline in bank lending and the money multiplier unexpected declines in inflation (and even the price level); nominal interest rates that are close to zero; and massive infusions of liquidity by the Bank of Japan that seem to have no effect at all (a "liquidity trap"). The primary purpose of my paper is to show that the Hayashi-Prescott hypothesis is not inconsistent with these monetary and financial developments. To the extent that this is true, monetary and fiscal policies, or reforms directed exclusively at the banking sector, are unlikely to reestablish productivity growth. What is likely needed are economy-wide reforms that enhance the willingness and ability of individuals to adopt potentially disruptive technological advancements and work practices.

Suggested Citation

  • Andolfatto, David, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 1-20, December.
    • Handle: RePEc:ime:imemes:v:21:y:2003:i:4:p:1-20
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Interest rates and slumps: competing views
      by David Andolfatto in MacroMania on 2011-09-22 23:34:00
    2. The ridiculous Paul Krugman
      by David Andolfatto in MacroMania on 2012-09-14 21:40:00

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    Cited by:

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    2. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
    3. Claudio Morana, 2005. "The Japanese deflation: has it had real effects? Could it have been avoided?," Applied Economics, Taylor & Francis Journals, vol. 37(12), pages 1337-1352.
    4. David Andolfatto, 2015. "A Model of U.S. Monetary Policy Before and After the Great Recession," Review, Federal Reserve Bank of St. Louis, vol. 97(3), pages 233-256.
    5. David E. Lebow, 2004. "The monetisation of Japan's government debt," BIS Working Papers 161, Bank for International Settlements.
    6. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.
    7. Koichi Hamada, 2004. "Policy Making In Deflationary Japan," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 221-239, September.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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