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Distortions in Factor Markets and Structural Adjustments in the Economy

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Author Info
Masayuki Nakakuki
Akira Otani
Shigenori Shiratsuka

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Abstract

In this paper, we carry out qualitative and quantitative analyses of impacts of factor market distortions on Japan's economic stagnation in the 1990s, thereby showing that resolution of structural impediments is essential for sustained economic growth to be restored in the future. Distortions in factor markets lead the economy to exhibit inefficient resource allocations,resulting in an inward shift of the nation's production possibility frontier and decline in its attainable output.Our estimation results reveal that the deterioration of distortions in factor markets is attributable to 0.5% of the decline in real GDP growth (-3.6%) after the bursting of the asset price bubble. This confirms that the exacerbation of structural impediments in factor markets is one of the major causes of the prolonged economic stagnation after the bursting of the asset price bubble. Moreover,given that autonomous resolution of factor market distortions through market mechanismis hardly expected,it is important to take measures to achieve a more efficient allocation of productive resources. Without such measures,monetary and fiscal policies cannot push the economy back to a sustainable growth path.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d04-26.

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Date of creation: Apr 2004
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Handle: RePEc:hst:hstdps:d04-26

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Related research
Keywords: Structural Problems; Heckscher-Ohlin Model; Specific Factor Model; Production Possibility Frontier; Total Factor Productivity(TFP);

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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  1. Koike, Ryoji, 2004. "Japan's Foreign Direct Investment and Structural Changes in Japanese and East Asian Trade," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(3), pages 145-82, October. [Downloadable!]
  2. 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. [Downloadable!]
  3. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2006. "Zombie Lending and Depressed Restructuring in Japan," NBER Working Papers 12129, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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