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Do Investment-Specific Technological Changes Matter For Business Fluctuations? Evidence From Japan

  • YASUO HIROSE
  • TAKUSHI KUROZUMI

The observed decline in the relative price of investment goods in Japan suggests the existence of investment-specific technological (IST) changes. This paper examines whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model with Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We then find that the estimated investment adjustment cost shocks correlate strongly with the diffusion index of firms' financial position in the Tankan (Short-term Economic Survey of Enterprises in Japan). We thus argue that the large decline in investment growth in the early 1990s is due to an increase in investment adjustment costs stemming from firms' tight financial constraint after the collapse of Japan's asset price bubble.

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File URL: http://hdl.handle.net/10.1111/j.1468-0106.2012.00580.x
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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 17 (2012)
Issue (Month): 2 (05)
Pages: 208-230

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Handle: RePEc:bla:pacecr:v:17:y:2012:i:2:p:208-230
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