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

  • Lilia Karnizova

    ()

    (University of Ottawa)

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.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 33 (2013)
Issue (Month): 2 ()
Pages: 1146-1158

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Handle: RePEc:ebl:ecbull:eb-12-00621
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  1. 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.
  2. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  3. Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
  4. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
  5. Beaudry, Paul & Portier, Franck, 2005. "The 'News' View of Economic Fluctuations: Evidence from Aggregate Japanese Data and Sectoral US Data," CEPR Discussion Papers 5176, C.E.P.R. Discussion Papers.
  6. Lilia Karnizova, 2008. "The Spirit of Capitalism and Expectation Driven Business Cycles," Working Papers 0804E, University of Ottawa, Department of Economics.
  7. Ellen R. McGrattan & Edward C. Prescott, 2009. "Unmeasured investment and the puzzling U.S. boom in the 1990s," Staff Report 369, Federal Reserve Bank of Minneapolis.
  8. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2009. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Vanderbilt University Department of Economics Working Papers 0921, Vanderbilt University Department of Economics.
  9. 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.
  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. repec:ebl:ecbull:v:3:y:2006:i:7:p:1-8 is not listed on IDEAS
  12. 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.
  13. Xiao Wei, 2004. "Explaining Speculative Expansions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-32, August.
  14. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  15. 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.
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