Equilibrium Indeterminacy and Asset Price Fluctuation in Japan: A Bayesian Investigation

This paper investigates sources of asset price fluctuation in Japan using an estimated financial accelerator model. For explicit treatment of expectational beliefs characterized by sunspots, the model is analyzed over the parameter space where the equilibrium can be indeterminate. We show that indeterminacy arises if the financial accelerator effect is sufficiently large. According to our Bayesian estimation results, Japan's economy was affected by sunspot shocks; however, the contribution of the sunspots to asset price volatility was low. Rather, net worth and cost shocks drove the asset price fluctuation. We find, however, that the sunspots substantially affected capital investment.     

LOCATION OF PUBLIC FIRM IN THE PRESENCE OF MULTINATIONAL FIRM: A MIXED DUOPOLY APPROACH*

By incorporating a multinational private firm into the mixed duopoly model with Hotelling‐type spatial competition, we show that the private firm's nationality is a matter of the public firm's location. As the share of foreign capital increases in the private (multinational) firm, the public firm moves to a central place. The effects of price regulation and sequential location choice are also discussed.     

ON DECREASING MARGINAL IMPATIENCE*

One of the most controversial assumptions in endogenous time preference theory is that the degree of impatience is marginally increasing in wealth. We examine the implications of an empirically more relevant specification whereby time preference exhibits decreasing marginal impatience (DMI). With DMI, there are multiple steady‐state non‐satiated and satiated equilibria. In a constant interest rate economy, the non‐satiated steady‐state point is necessarily unstable. In a capital economy with decreasing returns technology, both the non‐satiated and satiated steady‐state points can be saddlepoint stable. The model is used to examine policy implications for the effects of capital taxation and government spending.     

Indeterminacy and Forecastability

Recent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky‐price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large.     

DO INVESTMENT‐SPECIFIC TECHNOLOGICAL CHANGES MATTER FOR BUSINESS FLUCTUATIONS? EVIDENCE FROM JAPAN

The observed decline in the relative price of investment goods to consumption goods in Japan suggests the existence of investment‐specific technological (IST) changes. We examine whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model using Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We find that the estimated series of the investment adjustment cost shock correlates strongly with the diffusion index of firms' financial position in the Tankan (Short‐term Economic Survey of Enterprises in Japan). Therefore, we argue that the large decline in investment growth in the early 1990s was due to an increase in investment adjustment costs stemming from firms' financial constraints after the collapse of Japan's asset price bubble.     

Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach

We examine whether the news shocks, as explored in Beaudry and Portier (2004) , can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity (TFP), and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (i) news shocks play a relatively more important role in the United States than in Japan, (ii) a news shock with a longer forecast horizon has larger effects on nominal variables, and (iii) the overall effect of the TFP on hours worked becomes ambiguous in the presence of news shocks.     

MIGRATION AND AGGLOMERATION WITH KNOWLEDGE SPILLOVERS*

In this paper, a Grossman–Helpman–Romer‐type endogenous growth model is developed that incorporates two regions and mobile workers. While the linkage between final goods firms and intermediate goods firms is strong, the linkage between innovation activities and manufacturing activities is weak in our paper. It is possible for the economy to reach either full agglomeration, partial agglomeration, or segmented agglomeration. We find that mobile workers acquire the highest welfare under full agglomeration. However, under segmented agglomeration, the welfare of skilled workers is not necessarily the lowest.     

MICROECONOMIC FOUNDATION OF LENDER OF LAST RESORT FROM THE VIEWPOINT OF PAYMENTS*

We construct a model to clarify the mechanism by which the lender of last resort (LLR) can prevent bank runs. In our model, a bank has both the function of facilitating payments in which inside money is settled using outside money and the function of financial intermediation using a deposit contract. The deposit contract might lead to a bank run, and might even contribute to an efficient allocation. Therefore, to consider the liquidity supply by the LLR, we introduce the deposit contract as a factor of instability in the banking model. We show that the LLR can assist in the recovery of both the efficiency and stability of the financial system.     

Changes in the Federal Reserve Communication Strategy: A Structural Investigation

This paper structurally investigates the changes in the Fed's communication strategy since the mid‐1990s through the lens of anticipated and unanticipated disturbances to a Taylor rule. The anticipated disturbances are identified using Treasury bond yield data in estimating a dynamic stochastic general equilibrium (DSGE) model with a term structure of interest rates. Our estimation results show that the Fed's decisions were unanticipated for market participants until 1999, but thereafter a larger portion of its future policy actions tended to be communicated in advance. We also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999. The bond yield data is indispensable to these results, since it contains crucial information on an expected future path of the federal funds rate.