Working Less and Bargain Hunting More: Macroimplications of Sales during Japan's Lost Decades

Standard New Keynesian models have often neglected temporary sales. In this study, we ask whether this treatment is appropriate. We use Japanese scanner data covering the last two decades and find a negative correlation between the frequency of sales and hours worked. We then construct a model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. We show that the decline in hours worked explains the rise in the frequency of sales. The real effect of monetary policy shocks weakens by around 40% due to temporary sales, but monetary policy still matters.     

Optimal Mortgage Refinancing with Regime Switches

A model of rational mortgage refinancing is developed where the drift and volatility of interest rate process switch between two regimes. Because of the possibility of a regime shift, the optimal refinancing policy is characterized by the different threshold of interest differential for each regime. Numerical simulation demonstrates that the optimal refinancing threshold in each regime can be smaller or larger than the threshold under single-regime models. Finally, we evaluate the predictions of the model, based on the estimated parameters for a two-regime model to capture the evolution of the mortgage rates in the US. Our model can produce both late and early refinancing, which is consistent with the observed refinancing behavior. The views expressed in this paper are solely those of the authors and do not necessarily reflect official positions of the Sumitomo Trust and Banking Co., Ltd.     

How an innovation is formed: A case study of Japanese word processors

An innovation is formed in the social system through the diffusion process, and artifacts that embody the innovation alter their aspects considerably. This study proposes an innovation-diffusion model on the assumption that an innovation interacts with a social system, which shows dynamic and self-organizing characteristics. That is, firstly, an innovation appears that overthrows the existing technological paradigm. Secondly, after the appearance of an innovation, engineers or relevant professionals witnessing the innovation conduct various kinds of trial and error to compete with each other. Thirdly, under passing through the turmoil period, the social system in which an innovation has been implemented becomes changing its structure. Fourthly, once an innovation has surpassed the irreversible phase, obtaining the dominant design, it becomes embedded into the social system. In order to verify the model, I refer to the diffusion process of the Japanese word processors into the Japanese society around 1980s. Following the result of this study, this paper points out that the diffusion theory should be reconsidered, especially about the meanings of the critical mass, the dichotomy of the innovator-imitator model, and so on. Besides, strategic planners or policy makers would do well to construct innovation strategies or technology policies to implement the innovation by affecting such factors as the internal and external influence factors and the population of the potential adopters.     

A New Method for Identifying the Effects of Foreign Exchange Interventions

Central banks react even to intraday changes in the exchange rate; however, in most cases, intervention data are available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We apply the Bayesian Markov‐chain Monte Carlo (MCMC) approach to this endogeneity problem. We use “data augmentation” to obtain intraday intervention amounts and estimate the efficacy of interventions using the augmented data. Applying this new method to Japanese data, we find that an intervention of 1 trillion yen moves the yen/dollar rate by 1.8%, which is more than twice as much as the magnitude reported in previous studies applying ordinary least squares to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.     

Endogenous Cycles in Collateralized Credit

This paper presents a simple and tractable equilibrium model, where collateralized credit emerges under limited commitment. We show that even if there is no time variation in fundamentals, credit trade can fluctuate endogenously over time. In our theory, credit fragilities are associated with endogenous fluctuations in trade probabilities, collateral values, and lending volumes.