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Equilibrium Indeterminacy and Asset Price Fluctuation in Japan: A Bayesian Investigation

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  • YASUO HIROSE

Abstract

This paper investigates sources of asset price fluctuation in Japan using an estimated financial accelerator model. For explicit treatment of expectational beliefs characterized by sunspots, the model is analyzed over the parameter space where the equilibrium can be indeterminate. We show that indeterminacy arises if the financial accelerator effect is sufficiently large. According to our Bayesian estimation results, Japan's economy was affected by sunspot shocks; however, the contribution of the sunspots to asset price volatility was low. Rather, net worth and cost shocks drove the asset price fluctuation. We find, however, that the sunspots substantially affected capital investment. Copyright (c) 2008 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 5 (08)
Pages: 967-999

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:5:p:967-999

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
  2. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
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  5. Faia, Ester & Monacelli, Tommaso, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," CEPR Discussion Papers 4880, C.E.P.R. Discussion Papers.
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  7. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  8. Jinill Kim & Sunghyun Henry Kim, 1999. "Spurious Welfare Reversals in International Business Cycle Models," Virginia Economics Online Papers 319, University of Virginia, Department of Economics.
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  10. 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.
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  14. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  15. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  16. Andreas Beyer & Roger E. A. Farmer, 2007. "Testing for Indeterminacy: An Application to U.S. Monetary Policy: Comment," American Economic Review, American Economic Association, vol. 97(1), pages 524-529, March.
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  19. Fuchi, Hitoshi & Muto, Ichiro & Ugai, Hiroshi, 2005. "A Historical Evaluation of Financial Accelerator Effects in Japan's Economy," MPRA Paper 4648, University Library of Munich, Germany.
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  21. Queijo, Virginia, 2005. "How Important are Financial Frictions in the U.S. and Euro Area?," Seminar Papers 738, Stockholm University, Institute for International Economic Studies.
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Cited by:
  1. Ippei Fujiwara & Yasuo Hirose, 2012. "Indeterminacy and Forecastability," CAMA Working Papers 2012-48, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Yasuo Hirose & Takushi Kurozumi, 2012. "Do Investment-Specific Technological Changes Matter For Business Fluctuations? Evidence From Japan," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 208-230, 05.
  3. Sohei Kaihatsu & Takushi Kurozumi, 2014. "Sources of Business Fluctuations: Financial or Technology Shocks?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 224-242, April.
  4. Bruno Coric, 2011. "The financial accelerator effect: concept and challenges," Financial Theory and Practice, Institute of Public Finance, vol. 35(2), pages 171-196.
  5. repec:syd:wpaper:2123/8187 is not listed on IDEAS
  6. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: a Survey," Working Papers 121301, University of California-Irvine, Department of Economics.
  7. Yasuharu Iwata, 2011. "The Government Spending Multiplier and Fiscal Financing: Insights from Japan," International Finance, Wiley Blackwell, vol. 14(2), pages 231-264, 06.

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