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Monetary Implications of the Hayashi-Prescott Hypothesis for Japan

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  • David Andolfatto

    (Simon Fraser University)

Abstract

Hayashi and Prescott speculate that the anemic performance of the Japanese economy since the early 1990s can be understood in terms of how any "well functioning" private sector might react to an exogenous productivity shock. In particular, they downplay the role of monetary and financial factors in shaping Japan's "lost decade." But many view the monetary and financial developments in Japan as direct evidence of a " malfunctioning" financial sector: These developments include a steady decline in bank lending and the money multiplier unexpected declines in inflation (and even the price level); nominal interest rates that are close to zero; and massive infusions of liquidity by the Bank of Japan that seem to have no effect at all (a "liquidity trap"). The primary purpose of my paper is to show that the Hayashi-Prescott hypothesis is not inconsistent with these monetary and financial developments. To the extent that this is true, monetary and fiscal policies, or reforms directed exclusively at the banking sector, are unlikely to reestablish productivity growth. What is likely needed are economy-wide reforms that enhance the willingness and ability of individuals to adopt potentially disruptive technological advancements and work practices.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0307008.

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Date of creation: 16 Jul 2003
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Handle: RePEc:wpa:wuwpma:0307008

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Keywords: Japan; Productivity Slowdown; Liquidity Trap;

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References

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  1. Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February.
  2. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
  3. Zeira, Joseph, 1999. "Informational overshooting, booms, and crashes," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 237-257, February.
  4. Taizo Motonishi & Hiroshi Yoshikawa, 1999. "Causes of the Long Stagnation of Japan during the 1990fs: Financial or Real?," CIRJE F-Series CIRJE-F-56, CIRJE, Faculty of Economics, University of Tokyo.
  5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  6. Champ, Bruce & Freeman, Scott, 1990. "Money, Output, and the Nominal National Debt," American Economic Review, American Economic Association, vol. 80(3), pages 390-97, June.
  7. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 2001. "The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 395-450, February.
  8. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Interest rates and slumps: competing views
    by David Andolfatto in MacroMania on 2011-09-22 18:34:00
  2. The ridiculous Paul Krugman
    by David Andolfatto in MacroMania on 2012-09-14 16:40:00
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Cited by:
  1. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.
  2. David E. Lebow, 2004. "The monetisation of Japan's government debt," BIS Working Papers 161, Bank for International Settlements.
  3. Claudio Morana, 2004. "The Japanese Deflation: Has It Had Real Effects? Could It Have Been Avoided?," ICER Working Papers 29-2004, ICER - International Centre for Economic Research.
  4. Keiichiro Kobayashi & Masaru Inaba, 2005. "Business Cycle Accounting for the Japanese Economy," Discussion papers 05023, Research Institute of Economy, Trade and Industry (RIETI).

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