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Business Cycles, Asset Prices, and the Frictions of Capital and Labor

Listed author(s):
  • Hirokazu Mizobata

    ()

    (Faculty of Economics, Tezukayama University)

  • Hiroki Toyoda

    ()

    (Institute of Economic Research, Kyoto University)

Registered author(s):

    We propose a simple real business cycle model to explain two of the most important aspects of macroeconomics: business cycle facts and the asset pricing mechanism. Based on US and Japanese quarterly data, we estimate the model with capital and labor adjustment costs. Our analysis reveals that this simple model can explain the key business cycle facts, even without other frictions such as sticky prices, sticky wages, and search and matching frictions. Furthermore, this simple model also has explanatory power for whether a stock price will increase or decrease. However, this feature of the model is weaker for the Great Recession in the US economy.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP953.pdf
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    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 953.

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    Length: 34pages
    Date of creation: Nov 2016
    Handle: RePEc:kyo:wpaper:953
    Contact details of provider: Postal:
    Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501

    Phone: +81-75-753-7102
    Fax: +81-75-753-7193
    Web page: http://www.kier.kyoto-u.ac.jp/eng/index.html
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    12. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 513-542.
    13. Zanetti, Francesco, 2008. "Labor and investment frictions in a real business cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3294-3314, October.
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    15. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
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    18. Ogawa, Kazuo & Kitasaka, Shin-ichi & Yamaoka, Hiroshi & Iwata, Yasuharu, 1996. "Borrowing Constraints and the Role of Land Asset in Japanese Corporate Investment Decision," Journal of the Japanese and International Economies, Elsevier, vol. 10(2), pages 122-149, June.
    19. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
    20. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    21. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 251-287, April.
    22. Cochrane, John H, 1991. " Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations," Journal of Finance, American Finance Association, vol. 46(1), pages 209-237, March.
    23. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    24. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 899-927.
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