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Business Fixed Investment and "Bubbles": the Japanese Case

Huntley Schaller and Bob Chirinko ()

Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The two key questions which motivate our work are: do bubbles exist (in the sense that stock market prices do not always correspond to the present value of expected future profitability) and, if bubbles exist, do they have an effect on business fixed investment? The case of Japan is particularly interesting because of the dramatic movements in the Japanese stock market and the wide perception that these were associated with a bubble. We use a variety of techniques to analyse these questions. First, we examine financing and investment patterns to gauge firms' reactions to the 1980s stock market run-up. Second, we test subsets of the orthogonality conditions associated with the empirical first-order conditions for fixed investment. Third, we use the linear projection to decompose stock market prices into fundamental and bubble components, allowing us to carry out parametric estimates of the effect of the bubble component on fixed investment. The data strongly suggest that there was a bubble that had an economically important statistically significant effect on business fixed investment in Japan.

Keywords: investment; financial market; bubbles (search for similar items in EconPapers)
JEL-codes: E44 E22 G10 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1995-12, Revised 2001
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Published: – revised version in American Economic Review, Vol. 91, No. 3 (June 2001), pp. 663–680

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Journal Article: Business Fixed Investment and "Bubbles": The Japanese Case (2001) Downloads
Working Paper: Business Fixed Investment and "Bubbles": The Japanese Case (1996) Downloads
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