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The Boom-Bust Cycle in Japanese Asset Prices

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  • Alpanda, Sami
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    Abstract

    The Japanese economy experienced a substantial increase and a subsequent crash in land and stock prices in the 1980s and 90s. I use a neoclassical growth model to determine how much of these asset price movements can be accounted for by the observed changes in fundamentals of the Japanese economy; in particular changes in productivity growth and government policy regarding land taxation. In the model, corporations issue land-collateralized debt to reduce their tax liabilities and the government follows a land-taxation policy that is countercyclical to land prices. These features substantially magnify the effect of small shocks by reducing the required return on land. With the model calibrated to Japanese data, I find that the observed changes in fundamentals cannot simultaneously account for the movements in asset prices and macroeconomic variables. In particular, with persistent changes in fundamentals, the observed asset prices can be justified, but at the cost of counter-predicting macroeconomic variables.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5895.

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    Date of creation: Nov 2007
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    Handle: RePEc:pra:mprapa:5895

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    Keywords: Japan; land prices; asset pricing; land taxation; general equilibrium;

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    1. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    2. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
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    4. Kenneth R. French & James M. Poterba, 1990. "Were Japanese Stock Prices Too High?," NBER Working Papers 3290, National Bureau of Economic Research, Inc.
    5. Douglas Stone & William T. Ziemba, 1993. "Land and Stock Prices in Japan," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 149-165, Summer.
    6. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
    7. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    8. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    9. Kiyohiko G. Nishimura & Fukujyu Yamazaki & Takako Idee & Toshiaki Watanabe, 1999. "Distortionary Taxation, Excessive Price Sensitivity, and Japanese Land Prices," NBER Working Papers 7254, National Bureau of Economic Research, Inc.
    10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
    11. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
    12. Takatoshi Ito & Tokuo Iwaisako, 1995. "Explaining Asset Bubbles in Japan," NBER Working Papers 5358, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Hiroki Arato & Katsunori Yamada, 2010. "Japan's Intangible Capital and Valuation of Corporations in a Neoclassical Framework," ISER Discussion Paper 0772, Institute of Social and Economic Research, Osaka University, revised Nov 2011.

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