What caused Japan’s Great Stagnation in the 1990s? Evidence from an estimated DSGE model

Sohei Kaihatsu and Takushi Kurozumi

Journal of the Japanese and International Economies, 2014, vol. 34, issue C, 217-235

Abstract: Despite the widespread belief that Japan’s “Great Stagnation” in the 1990s is due to the financial dysfunction after the collapse of asset price bubbles, Hayashi and Prescott (2002) argue that its main cause is a slowdown in total factor productivity growth, using a calibrated neoclassical growth model. The present paper aims to fill this gap by estimating a New Keynesian dynamic stochastic general equilibrium model augmented with a financial accelerator mechanism and associated financial shocks. Our estimation results show that even in the presence of the financial shocks an adverse neutral technology shock mainly induced the Great Stagnation and that the rate of neutral technological change is strongly correlated with all enterprises’ financial position in the Tankan. Based on these findings, the paper argues that the Great Stagnation was caused by an adverse neutral technology shock that is likely to represent a tightening of firms’ financing, which induced reduction of R&D investment and misallocation of resources as indicated in previous literature.

Keywords: Japan’s Great Stagnation in the 1990s; Slowdown in TFP growth; Adverse neutral technology shock; Tightening of firms’ financing; Estimated DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:34:y:2014:i:c:p:217-235

DOI: 10.1016/j.jjie.2014.08.002

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