What caused the great recession? Was it caused by the inadequacy of resource allocation or by the decline of total factor productivity? (in Japanese)

Yutaka Harada and Kazuyoshi Nakata

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

Abstract: Economic growth was achieved by inputs of labor and capital, and by technological progress. Therefore, to achieve good economic performance, there can be no disturbances that impede free and efficient inputs of labor and capital in the market, and that technology progress is vigorous. There are various arguments on why Japan's economy stagnated in the 1990s and beyond, but few attempts have been made to analyze the stagnated situations based on the idea of a neo-classical growth model. We explored how the economy is affected by disturbances of the prices of labor and capital based on the idea of a neo-classical growth model. First, we calculated the marginal productivity of capital, the marginal productivity of labor, Euler equation, and substitution of leisure and labor to select parameters so that they can reproduce real economic data. Real return to capital exceeded marginal productivity of capital before 1990, but fell below one after 1990. On the contrary, real wages were under marginal productivity of labor, but were over after 1990. Second, concerning wages, we calculated how much labor input and production increased, unless there was no discrepancy between real wages and marginal productivity of labor. The calculation shows that labor input increased by 20 percent, and production increased by 16 percent. Third, this increase of labor input is not considered to worsen utility of people considering that substitute of leisure were not preferred in 1990s. Finally, the problem of which factors caused the inefficient allocation of leisure and labor remains. We can tentatively say that monetary shock and the rigidity of wages caused it.

Pages: 24 pages
Date: 2003-11
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