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Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan

Jonathan Lecznar and Thomas Lubik ()

No 17-8, Working Paper from Federal Reserve Bank of Richmond

Abstract: We study the dynamics of consumption, the real interest rate, and measures of labor input in Japan over the period from 1985-2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the Generalized Methods of Moments shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions. Specifically, following the tax hike and during the low nominal rate period, Japanese households became less risk averse and exhibited a higher degree of habit formation.

Keywords: nominal interest rate; Euler equation; labor supply; GMM (search for similar items in EconPapers)
JEL-codes: E21 C26 E43 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2017-05-18, Revised 2017-05-18
New Economics Papers: this item is included in nep-mac
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Handle: RePEc:fip:fedrwp:17-08