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Financial shocks in Japan : A case for a small open economy

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  • Yue Zhao

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    (Graduate School of Economics, Kyoto University)

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    Abstract

    Following Jermann and Quadrini (2012), we apply the dynamic stochastic general equilib- rium modeling method (DSGE) to assess whether nancial shocks matter for the Japanese economy. We construct time series of nancial shocks and productivity shocks using Japan's quarterly data since 2001 and conduct simultaneous replication on major indi- cators of aggregate financial flows and real variables. Preliminary results tell us that in a closed economy, nancial shocks seem less important than they were in the U.S. economy. However, after extending the original model to a small open economy in which rms can borrow from overseas lenders but may have to pay a default risk premium on interest payments, simulated results show that nancial shocks have contributed heavily to the dynamics of aggregate debt and dividend flows. This is consistent with Jermann and Quadrini's (2012) nding on the U.S. economy. By contrast, however, productivity shocks seem to have been dominant in accounting for fluctuations of real variables, such as output, consumption ratio, and investment ratio in Japan.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP849.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 849.

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    Length: 34pages
    Date of creation: Feb 2013
    Date of revision:
    Handle: RePEc:kyo:wpaper:849

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    Related research

    Keywords: DSGE model; financial friction; small open economy; simulation;

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    1. Ippei Fujiwara & Yuki Teranishi, 2010. "Real exchange rate dynamics revisited: a case with financial market imperfections," Globalization and Monetary Policy Institute Working Paper 62, Federal Reserve Bank of Dallas.
    2. Nobuhiro Kiyotaki & Gauti Eggertsson & Andrea Ferrero & Marco Del Negro, 2010. "The Great Escape? A Quantitative Evaluation of the Fed’s Non-Standard Policies," 2010 Meeting Papers 113, Society for Economic Dynamics.
    3. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, vol. 70(1), pages 82-114, September.
    4. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Do banking shocks matter for the U.S. economy?," Globalization and Monetary Policy Institute Working Paper 86, Federal Reserve Bank of Dallas.
    5. 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.
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