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Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?

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  • Ichiro Muto

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

  • Shunichi Yoneyama

    (Bank of Japan)

Abstract

The lost decades following the bubble burst in 1991 has been accompanied by slowdown of total factor productivity (TFP) growth in Japan. What has driven the TFP down, however, remains a puzzle. To address this question, we develop a New Keynesian sticky price model that is designed to investigate two suspects behind the TFP slowdown other than regression of technology; (i) malfunction of financial intermediation, and (ii) inter- and intra-sectoral misallocation of resources. Namely, our model consists of two goods producing sectors and financial intermediation and non-technology shocks endogenously alter the observed TFP through these channels. We use an estimated model based on the data from the 1980s to the 2010s to demonstrate that exogenous deteriorations of balance sheets of financial intermediaries and firms contributed a sizable portion of TFP decline by hampering financial intermediation. We also show that such shocks play the dominant role in generating persistent deflation during the lost decades.
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  • Ichiro Muto & Nao Sudo & Shunichi Yoneyama, "undated". "Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?," Bank of Japan Working Paper Series 16-E-3, Bank of Japan.
  • Handle: RePEc:boj:bojwps:wp16e03
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    Cited by:

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    2. Nao Sudou, 2012. "Financial Markets, Monetary Policy and Reference Rates: Assessments in DSGE Framework," Bank of Japan Working Paper Series 12-E-12, Bank of Japan.
    3. Barry Eichengreen & Donghyun Park & Kwanho Shin, 2017. "The Global Productivity Slump: Common and Country-Specific Factors," Asian Economic Papers, MIT Press, vol. 16(3), pages 1-41, Fall.
    4. Muto, Ichiro, 2017. "The role of the reference rate in an interbank market with imperfect information," Global Finance Journal, Elsevier, vol. 34(C), pages 16-31.
    5. Kaihatsu, Sohei & Kurozumi, Takushi, 2014. "What caused Japan’s Great Stagnation in the 1990s? Evidence from an estimated DSGE model," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 217-235.
    6. Satoshi Hoshino & Daisuke Ida, 2021. "Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model," Discussion Papers 2116, Graduate School of Economics, Kobe University.
    7. Shirai, Daichi, 2016. "Persistence and Amplification of Financial Frictions," MPRA Paper 72187, University Library of Munich, Germany.
    8. Yuka Nakajima & Jun Matsushima, 2022. "Japan’s Low-growth Economy from the Viewpoint of Energy Quality," International Journal of Energy Economics and Policy, Econjournals, vol. 12(1), pages 460-468.
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    10. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.

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    More about this item

    Keywords

    Lost Decades; Total Factor Productivity; Balance Sheet Problem;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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