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What causes business cycles? Analysis of the Japanese industrial production data

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  • Iyetomi, Hiroshi
  • Nakayama, Yasuhiro
  • Yoshikawa, Hiroshi
  • Aoyama, Hideaki
  • Fujiwara, Yoshi
  • Ikeda, Yuichi
  • Souma, Wataru

Abstract

We explore what causes business cycles by analyzing the Japanese industrial production data. The methods used are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant. Taking advantage of the information revealed by disaggregated data, we identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We also demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model holds up even under the 2008-2009 recession. Because a fall of output during 2008-2009 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.

Suggested Citation

  • Iyetomi, Hiroshi & Nakayama, Yasuhiro & Yoshikawa, Hiroshi & Aoyama, Hideaki & Fujiwara, Yoshi & Ikeda, Yuichi & Souma, Wataru, 2011. "What causes business cycles? Analysis of the Japanese industrial production data," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 246-272, September.
  • Handle: RePEc:eee:jjieco:v:25:y:2011:i:3:p:246-272
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    References listed on IDEAS

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    Cited by:

    1. Kumano, Yusuke & Muto, Ichiro & Nakano, Akihiro, 2014. "What explains the recent fluctuations in Japan’s output? A structural factor analysis of Japan’s industrial production," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 135-153.
    2. Hiroshi Yoshikawa, 2015. "Stochastic macro-equilibrium: a microfoundation for the Keynesian economics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(1), pages 31-55, April.
    3. IKEDA Yuichi & AOYAMA Hideaki & IYETOMI Hiroshi & MIZUNO Takayuki & OHNISHI Takaaki & SAKAMOTO Yohei & WATANABE Tsutomu, 2016. "Econophysics Point of View of Trade Liberalization: Community dynamics, synchronization, and controllability as example of collective motions," Discussion papers 16026, Research Institute of Economy, Trade and Industry (RIETI).
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.

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