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Sluggish private investment in Japan’s Lost Decade: Mixed frequency vector autoregression approach

Kaiji Motegi and Akira Sadahiro

The North American Journal of Economics and Finance, 2018, vol. 43, issue C, 118-128

Abstract: It is well known that sluggish private investment plagued the Japanese macroeconomy during the Lost Decade. Previous empirical papers have not reached a clear consensus on what caused the investment slowdown. This paper sheds new light on this issue by fitting a mixed frequency vector autoregressive model to monthly stock prices, quarterly bank loans, firm profit, and private investment. Monthly stock prices explain as much as 50.7% of the long-run forecast error variance of investment. We also reveal a spiral of declining stock prices, profit, and investment. Finally, the stagnation of bank loans is a consequence of declined stock prices, and the former is not a cause of declined investment.

Keywords: Japan’s Lost Decade; Mixed Data Sampling (MIDAS); Mixed frequency vector autoregression (MF-VAR); Private investment (search for similar items in EconPapers)
JEL-codes: C32 E22 E44 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.najef.2017.10.009

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