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Sources of Business Fluctuations: Financial or Technology Shocks?

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  • Sohei Kaihatsu

    (Bank of Japan)

  • Takushi Kurozumi

    (Bank of Japan)

Abstract

Despite the widespread belief that technology shocks are the main source of business fluctuations, recent empirical studies indicate that in the absence of financial frictions, a shock to the marginal efficiency of investment is the main source and is closely related to financial conditions for investment. We incorporate a financial accelerator mechanism and two types of financial shocks to the external finance premium and net worth in a dynamic stochastic general equilibrium model with shocks to the marginal efficiency of investment, the investment-good price markup, and the rates of neutral and investment-specific technological changes. This model is estimated using eleven US time series that include data on loan, net worth, the loan rate, and the relative price of investment. Our estimation results show that the (non-stationary) neutral and investment-specific technology shocks primarily drive output and investment fluctuations, while the external finance premium shock plays an important role for investment fluctuations. This financial shock induced substantial falls and subsequent sharp hikes in the external finance premium and caused boom-bust cycles over the past two decades. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 17 (2014)
Issue (Month): 2 (April)
Pages: 224-242

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Handle: RePEc:red:issued:11-267

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Keywords: Business fluctuations; Neutral and investment-specific technology shocks; Financial accelarator mechanism; External finance premium shock; boom-bust cyle;

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Citations

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Cited by:
  1. Yasuo Hirose & Takushi Kurozumi, 2012. "Do Investment-Specific Technological Changes Matter For Business Fluctuations? Evidence From Japan," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 17(2), pages 208-230, 05.
  2. Naohisa Hirakata & Takushi Kurozumi, 2013. "The International Finance Multiplier in Business Cycle Fluctuations," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 13-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers, Kyoto University, Institute of Economic Research 849, Kyoto University, Institute of Economic Research.
  4. Yue ZHAO, 2013. "Role of Financial and Productivity Shocks in the US and Japan: A Two-Country Economy," KIER Working Papers, Kyoto University, Institute of Economic Research 881, Kyoto University, Institute of Economic Research.

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