Sources of Business Fluctuations: Financial or Technology Shocks?

Sohei Kaihatsu and Takushi Kurozumi

No 10-E-12, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Despite the widespread belief that technology shocks are the main source of business fluctuations, recent empirical studies find that an investment efficiency shock mainly drives such fluctuations and reflects financial conditions for investment. This poses the question as to what is the major source of the fluctuations, financial or technology shocks. We thus incorporate a financial accelerator mechanism into a DSGE model with stochastic trends in neutral and investment-specific technological changes, and replace the investment efficiency shock with two financial shocks to the external finance premium and to entrepreneurs' net worth. This model is estimated by Bayesian methods with data including the relative price of investment and credit growth. We show that, in both Japan and the U.S., the main driving force of output fluctuations is neutral technology shocks, and financial shocks are at least as important for investment fluctuations as technology shocks. We also show that a sharp decline and a subsequent hike in the external finance premium, caused by shocks to this premium, induced the boom and bust cycles of investment via the financial accelerator mechanism during the late 1980s and the 1990s in Japan and since 2004 in the U.S.

Keywords: Business fluctuations; Financial accelerator; Trend in technological changes; External finance premium; Boom and bust cycle (search for similar items in EconPapers)
JEL-codes: E22 E32 E51 (search for similar items in EconPapers)
Date: 2010-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.boj.or.jp/en/research/wps_rev/wps_2010/data/wp10e12.pdf (application/pdf)

Related works:
Journal Article: Sources of Business Fluctuations: Financial or Technology Shocks? (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:10-e-12

Access Statistics for this paper

More papers in Bank of Japan Working Paper Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().