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What Causes Business Cycles? Analysis of the Japanese Industrial Production Data

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

    We explore what causes business cycles by analyzing the Japanese industrial production data. The methods 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 2008-09 recession. Because a fall of output during 2008-09 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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    File URL: http://arxiv.org/pdf/0912.0857
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 0912.0857.

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    Date of creation: Dec 2009
    Date of revision: Nov 2010
    Handle: RePEc:arx:papers:0912.0857

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    Web page: http://arxiv.org/

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    1. Wesley Clair Mitchell, 1951. "What Happens During Business Cycles: A Progress Report," NBER Books, National Bureau of Economic Research, Inc, number mitc51-1, October.
    2. N. Gregory Mankiw, 1989. "Real Business Cycles: A New Keynesian Perspective," NBER Working Papers 2882, National Bureau of Economic Research, Inc.
    3. Diebold, Francis X & Rudebusch, Glenn D, 1990. "A Nonparametric Investigation of Duration Dependence in the American Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 596-616, June.
    4. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers 55, Federal Reserve Bank of Minneapolis.
    5. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    6. James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
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