Role of Financial and Productivity Shocks in the US and Japan: A Two-Country Economy

Jermann and Quadrini (2012) show that compared with productivity shocks, direct shocks to the credit system (" nancial shocks") have contributed to the most frequently observed dynamics of both real and nancial variables in the US within a closed economy framework. We develop a simple two-country model featuring an international bond market and enforcement constraints within both countries in an attempt to quantify the role of productivity and nancial shocks. We construct time series of productivity shocks and nancial shocks using the US and Japanese quarterly data since 2001 and conduct simultaneous replication on major indicators of real variables and aggregate nancial ows. The main results were as follows. First, for both the US and Japan, productivity shocks account for most real variable dynamics such as output and investment, while nancial shocks well capture the trend of consumption, current account, and labor trends in the US and succeed in replicating Japan's debt repurchase behavior. Nevertheless, it is noteworthy that nancial shocks served as key factors in accounting for the observed troughs of output, labor, and consumption, as well as the peaks of debt repurchase and the US current account during the 2007-09 nancial crisis. Second, it is surprising that observable international spillover e ect appeared only in Japan's debt repurchases. As it is widely considered that the Japanese economy have been deeply in uenced by US economic uctuations, our quantitative results raise questions about this opinion.