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Letting the speculative and the news views of the Japanese business cycle compete

Author

Listed:
  • Lilia Karnizova

    () (University of Ottawa)

Abstract

This note uses a dynamic stochastic general equilibrium model with direct preferences for financial wealth to explore how stock price booms and busts relate to the real side of the economy. It evaluates the 'speculative' (sunspots) and 'news' (anticipated future changes in productivity) explanations of the Japanese stock market bubble and economic business cycle in 1986-1999. Depending on parameter configurations, the model yields either a unique equilibrium or multiple equilibria. The note calibrates two versions of the model: (i) a version with multiple equilibria, driven solely by sunspot shocks, and (ii) a version with a unique equilibrium, driven by surprise and news shocks to productivity. In both cases, expectations shocks are estimated to perfectly match the historical path of the Nikkei stock market average. Simulation results show that, from the perspective of the model, both the speculative and the news views can explain equally well empirical investment. The two views, however, differ in their predictions for consumption, output and real wages. These differences could be explored in further work on disentangling empirical importance of sunspot and news shocks.

Suggested Citation

  • Lilia Karnizova, 2013. "Letting the speculative and the news views of the Japanese business cycle compete," Economics Bulletin, AccessEcon, vol. 33(2), pages 1146-1158.
  • Handle: RePEc:ebl:ecbull:eb-12-00621
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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I2-P108.pdf
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    References listed on IDEAS

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    1. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
    2. Beaudry, Paul & Portier, Franck, 2005. "The "news view" of economic fluctuations: Evidence from aggregate Japanese data and sectoral US data," Journal of the Japanese and International Economies, Elsevier, vol. 19(4), pages 635-652, December.
    3. Tomoyuki Nakajima, 2003. "Sunspot Fluctuations in Asset Prices and Business Cycles in Japan Over 1986-1999," The Japanese Economic Review, Japanese Economic Association, vol. 54(3), pages 253-274.
    4. Ellen R. McGrattan & Edward C. Prescott, 2010. "Unmeasured Investment and the Puzzling US Boom in the 1990s," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 88-123, October.
    5. Xiao Wei, 2004. "Explaining Speculative Expansions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-32, August.
    6. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-754, September.
    7. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    8. Fumio Hayashi & Edward C. Prescott, 2002. "The 1990s in Japan: A Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January.
    9. Karnizova, Lilia, 2010. "The spirit of capitalism and expectation-driven business cycles," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 739-752, September.
    10. Sainan Jin & Wanjun Jiang & Liangjun Su & Jianying Hu, 2006. "The Rise in House Prices in China: Bubbles or Fundamentals?," Economics Bulletin, AccessEcon, vol. 3(7), pages 1-8.
    11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    12. Karnizova Lilia, 2012. "News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-50, June.
    13. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2011. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 1-29, February.
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    15. Clark, Steven P. & Coggin, T. Daniel, 2011. "Was there a U.S. house price bubble? An econometric analysis using national and regional panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 189-200, May.
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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.

    More about this item

    Keywords

    sunspots; news shocks; Japanese economy; business cycles; stock market; expectations; speculations; bubbles; investment;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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