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Financial shocks in Japan : A case for a small open economy

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  • Yue Zhao

    (Graduate School of Economics, Kyoto University)

Abstract

Following Jermann and Quadrini (2012), we apply the dynamic stochastic general equilib- rium modeling method (DSGE) to assess whether nancial shocks matter for the Japanese economy. We construct time series of nancial shocks and productivity shocks using Japan's quarterly data since 2001 and conduct simultaneous replication on major indi- cators of aggregate financial flows and real variables. Preliminary results tell us that in a closed economy, nancial shocks seem less important than they were in the U.S. economy. However, after extending the original model to a small open economy in which rms can borrow from overseas lenders but may have to pay a default risk premium on interest payments, simulated results show that nancial shocks have contributed heavily to the dynamics of aggregate debt and dividend flows. This is consistent with Jermann and Quadrini's (2012) nding on the U.S. economy. By contrast, however, productivity shocks seem to have been dominant in accounting for fluctuations of real variables, such as output, consumption ratio, and investment ratio in Japan.

Suggested Citation

  • Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers 849, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:849
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP849.pdf
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    DSGE model; financial friction; small open economy; simulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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