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

Yue Zhao ()
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Yue Zhao: Graduate School of Economics, Kyoto University

No 849, KIER Working Papers from Kyoto University, Institute of Economic Research

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.

Keywords: DSGE model; financial friction; small open economy; simulation (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Pages: 34pages
Date: 2013-02
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac and nep-opm
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