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Monetary Implications of the Hayashi-Prescott Hypothesis for Japan


  • David Andolfatto

    (Simon Fraser University)


Hayashi and Prescott speculate that the anemic performance of the Japanese economy since the early 1990s can be understood in terms of how any "well functioning" private sector might react to an exogenous productivity shock. In particular, they downplay the role of monetary and financial factors in shaping Japan's "lost decade." But many view the monetary and financial developments in Japan as direct evidence of a " malfunctioning" financial sector: These developments include a steady decline in bank lending and the money multiplier unexpected declines in inflation (and even the price level); nominal interest rates that are close to zero; and massive infusions of liquidity by the Bank of Japan that seem to have no effect at all (a "liquidity trap"). The primary purpose of my paper is to show that the Hayashi-Prescott hypothesis is not inconsistent with these monetary and financial developments. To the extent that this is true, monetary and fiscal policies, or reforms directed exclusively at the banking sector, are unlikely to reestablish productivity growth. What is likely needed are economy-wide reforms that enhance the willingness and ability of individuals to adopt potentially disruptive technological advancements and work practices.
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  • David Andolfatto, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Macroeconomics 0307008, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0307008 Note: Type of Document - PDF; prepared on PC; to print on Lexmark;

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    References listed on IDEAS

    1. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February.
    2. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    3. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    4. Motonishi, Taizo & Yoshikawa, Hiroshi, 1999. "Causes of the Long Stagnation of Japan during the 1990s: Financial or Real?," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 181-200, September.
    5. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
    6. Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February.
    7. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 2001. "The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 395-450, February.
    8. Champ, Bruce & Freeman, Scott, 1990. "Money, Output, and the Nominal National Debt," American Economic Review, American Economic Association, vol. 80(3), pages 390-397, June.
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    Cited by:

    1. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
    2. Claudio Morana, 2005. "The Japanese deflation: has it had real effects? Could it have been avoided?," Applied Economics, Taylor & Francis Journals, vol. 37(12), pages 1337-1352.
    3. David E. Lebow, 2004. "The monetisation of Japan's government debt," BIS Working Papers 161, Bank for International Settlements.
    4. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.
    5. Koichi Hamada, 2004. "Policy Making In Deflationary Japan," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 221-239.

    More about this item


    Japan; Productivity Slowdown; Liquidity Trap;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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