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Accounting for the 'Lost Decade' in Japan


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  • Suparna Chakraborty

    (Federal Reserve Bank of Minneapolis & University of Minnesota)


There is no debate amongst economists that Japan performed poorly during the1990s. This can be seen in falling growth rates of GDP per capita, investment per capita and mounting problems of non performing loans and ballooning Government deficit. A lot of models have tried to come up with an explanation for the Lost Decade. However, none of them have yet been able to clearly account for the growth slump. At this point, it is necessary to revisit all possible distortions that might have caused the dismal performance during the 1990s. This would help us to correctly identify the possible problem areas and search for more specific causes of downturn of the economy in a considerably narrowed field. In this paper, I have tried to bring together the different proposed theories in a consolidated way to help isolate promising theories from not so promising ones. To do so, I applied the Business Cycle Accounting procedure developed by V V Chari, Ellen R McGrattan and Patrick Kehoe to the Japanese case. I find that efficiency wedge is important in explaining the dismal performance of the Japanese economy during the 1990s but labor wedge is not very important except for a brief span of time during 1996 to 1997. My most important result is that investment wedge played a major role in the performance of the Japanese economy during the 1990s. So, any model that tries to focus on what went wrong in Japan in 1990s would do well to focus on frictions on productivity and investment financing that might be at the root of the dismal performance of the Japanese economy.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0408009.

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Length: 51 pages
Date of creation: 13 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0408009

Note: Type of Document - pdf; pages: 51
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Related research

Keywords: Accounting; Business Cycles; Japan; Lost Decade; Kalman Filter;

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Cited by:
  1. Robert F. Martin, 2006. "The Baby Boom: Predictability in House Prices and Interest Rates," 2006 Meeting Papers 84, Society for Economic Dynamics.
  2. Jagjit S. Chadha & James Warren, 2012. "Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions," Studies in Economics 1207, Department of Economics, University of Kent.
  3. Alan Ahearne & Finn Kydland & Mark A. Wynne, 2006. "Ireland’s Great Depression," The Economic and Social Review, Economic and Social Studies, vol. 37(2), pages 215-243.
  4. Keiichiro Kobayashi & Masaru Inaba, 2005. "Business Cycle Accounting for the Japanese Economy," Discussion papers 05023, Research Institute of Economy, Trade and Industry (RIETI).
  5. Gao, Xu, 2007. "Business Cycle Accounting for the Chinese Economy," MPRA Paper 7050, University Library of Munich, Germany, revised Dec 2007.


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