sohei kaihatsu takushi kurozumi monetary affairs department, bank of japan
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Sohei Kaihatsu Takushi Kurozumi Monetary Affairs Department, Bank of Japan. Sources of Business Fluctuations: Financial or Technology Shocks?. Central Bank Macroeconomic Modeling Workshop Manila, Philippines October 20, 2010. - PowerPoint PPT PresentationTRANSCRIPT
Sohei KaihatsuTakushi Kurozumi
Monetary Affairs Department, Bank of Japan
Central Bank Macroeconomic Modeling WorkshopManila, PhilippinesOctober 20, 2010
The views expressed herein are those of the authors and should not be interpreted as those of the Bank of
Japan.
Growth Trend
Business Fluctuations
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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Time
Level of output
What is the source of economic fluctuations?
Question Addressed
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In the business cycle literature, technology shocks have been considered the main source of business fluctuations.
However, the recent severe economic downturn caused by the collapse of credit bubbles seems to suggest the importance of financial shocks.
Which is the major source of business fluctuations, financial or technology
shocks?
Which is the major source of business fluctuations, financial or technology
shocks?
Answer: Our Empirical Findings
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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In both U.S. and Japan, the major driving forces of output fluctuations are technology shocks.
In particular, neutral technology shocks are the major source of output fluctuations.
Financial shocks are at least as important for investment fluctuations as technology shocks.
External finance premium shows a sharp decline and a subsequent hike, and thereby induce the boom and bust cycles of investment.
Our Approach
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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Financial accelerator mechanism of Bernanke, Gertler, and Gilchrist [BGG] (1999).
DSGE model with stochastic trends in neutral and investment-specific technological changes.
Bayesian estimation with economic and financial data of U.S. and Japan.
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Investment efficiency shocks in U.S.
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Justiano, Primiceri, and Tambalotti (2010b):
Introduce stochastic trends in neutral and investment-specific technological changes.
DSGE model for non-stationary variables, which grows at rates given by stochastic trends in neutral and investment-specific technological changes.
Use data on the relative price of investment good in their estimation to identify investment-specific technology shock.
Investment efficiency shocks in U.S.(cont.)
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Time
Level of output
Stochastic Growth Trend
Technological Changes
Investment efficiency shocks in U.S.(cont.)
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Justiano, Primiceri, and Tambalotti (2010b):
Investment fluctuations are driven mainly by shocks to the marginal efficiency of investment.
Estimated investment efficiency shocks correlate with credit spreads, and thus capture financial conditions for investment.
Investment efficiency shocks in Japan
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Hirose and Kurozumi (2010):
Use a similar approach to that of Justiano et al. (2010b).
Investment fluctuations are driven mainly by investment efficiency shocks.
Estimated investment efficiency shocks correlate strongly with the D.I. for firms’ financial position. Thus, the shocks are interpreted as the tightness of firms’ financing.
Financial Shocks in a Financial Accelerator Mechanism
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Gilchrist, Ortiz, and Zakrasek (2009): A BGG-type financial accelerator is
incorporated into Smets-Wouters (2007) model.
Investment efficiency shocks are removed, and two financial condition shocks are introduced:
• External finance premium shock
• Net worth shock The financial accelerator mechanism is
operative in U.S. business cycles.
Our Contribution
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Financial accelerator mechanism of BGG (1999), together with the two types of financial shocks instead of investment efficiency shock.
DSGE model for non-stationary variables, which grow at rates given by stochastic trends in neutral and investment-specific technological changes.
Bayesian estimation with economic and financial data, including the data on the relative price of investment good.
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Outline of the Model
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Consumption
External Finance
Deposit
LaborRetailing
Production
Investment
Production
Capital
RetailerRetailer
Investment-Good Firm
Investment-Good Firm
Capital-Good FirmCapital-
Good Firm
Entrepreneur
Entrepreneur
Financial Intermediar
y
Financial Intermediar
y
Net Export GovernmentNet Export
Government
Consumption-Good FirmConsumption-Good FirmHouseholdHousehold
Central Bank
Central Bank
Monetary Policy
Investment Trend
Financial Accelerator
Outline of the Model
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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Consumption
External Finance
DepositLabor
Retailing
Production
Investment
Production
Capital
RetailerRetailer
Investment-Good Firm
Investment-Good Firm
Capital-Good FirmCapital-
Good Firm
Entrepreneur
Entrepreneur
Financial Intermediar
y
Financial Intermediar
y
Net Export GovernmentNet Export
Government
Consumption-Good FirmConsumption-Good FirmHouseholdHousehold
Central Bank
Central Bank
Monetary Policy
External finance
premium shock
Investment-specific
technology shock
Net worth shock
Outline of the Model
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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Consumption
External Finance
DepositLabor
Retailing
Production
Investment
Production
Capital
RetailerRetailer
Investment-Good Firm
Investment-Good Firm
Capital-Good FirmCapital-
Good Firm
Entrepreneur
Entrepreneur
Financial Intermediar
y
Financial Intermediar
y
Net Export GovernmentNet Export
Government
Consumption-Good FirmConsumption-Good FirmHouseholdHousehold
Central Bank
Central Bank
Monetary Policy
External finance
premium shock
Preferences shock
Exogenous demand shock
Wage markup shock
Retailers’ markup shock
Investment-good price markup
shock
Investment-specific
technology shock
Neutral technology
shock
Net worth shock
Monetary policy shock
External Finance Premium
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External finance premium shock
Entrepreneurs’ leverage ratio
The real borrowing rate is
Policy rate
External finance premium
External finance premium shock boosts the external finance premium beyond the level warranted by the current economic conditions.
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Estimation Strategy
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Rewrite the equilibrium conditions in terms of stationary variables detrended by neutral and investment-specific technological changes.
Log-linearize the equilibrium conditions represented in terms of detrended variables.
Estimate the system of the log-linearized equilibrium conditions by Bayesian likelihood approach.
Ten Shocks
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Ten Quarterly Time Series
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Sample periods: U.S. 1985:1Q-2008:4Q Japan 1981:1Q-1998:4Q
Measurement Equations
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Balanced growth rate
Investment-specific technology shock
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Parameter Estimates: U.S.
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Parameter Estimates: Japan
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Historical Decomposition of U.S.Output Growth
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-6
-4
-2
0
2
4
6
| 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 00 | 01 | 02 | 03 | 04 | 05 | 06 | 07 | 08
Others
Net worth
External finance premium
Investment-specific technology
Neutral technology
Output growth
y/y % chg.
Historical Decomposition of U.S.Investment Growth
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-30
-25
-20
-15
-10
-5
0
5
10
15
20
| 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 00 | 01 | 02 | 03 | 04 | 05 | 06 | 07 | 08
Other
Net worth
External finance premium
Investment-specific technology
Neutral technology
Investment growth
y/y % chg.
Variance Decompositions: U.S.
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Neutral Neutral technologytechnology
External External finance finance premiumpremium
Historical Decomposition of Japan’s Output Growth
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-8
-6
-4
-2
0
2
4
6
8
| 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98
OtherNet worthExternal finance premiumNeutral technologyInvestment-specific technologyOutput growth
y/y % chg.
Historical Decomposition of Japan’s Investment Growth
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-40
-30
-20
-10
0
10
20
30
| 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98
Other
Net worth
External finance premium
Investment-specific technology
Neutral technology
Investment growth
y/y % chg.
Variance Decompositions: Japan
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Neutral Neutral technologytechnology
External External finance finance premiumpremium
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The Estimated External Finance Premium in the U.S.
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0
1
2
3
4
5
| 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 00 | 01 | 02 | 03 | 04 | 05 | 06 | 07 | 08
%, External finance premium
Historical Decomposition of U.S.External Finance Premium
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-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
| 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 00 | 01 | 02 | 03 | 04 | 05 | 06 | 07 | 08
Others
Net worth
External finance premium
External finance premium
% point, deviation from steady state value
The Estimated External Finance Premium in Japan
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
| 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98
%, External finance premium
Historical Decomposition of Japan’s External Finance Premium
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
| 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98
Others
Net worth
External finance premium
External finance premium
% point, deviation from steady state value
The External Finance Premium and the Real Borrowing in U.S.
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95:1Q
96:1Q97:1Q 98:1Q
99:1Q01:1Q
00:1Q
02:1Q
03:1Q
05:1Q
06:1Q
07:1Q
04:1Q
08:1Q
0
1
2
3
4
50 60 70 80 90 100 110 120 130
%, External finance premium
Real borrowing (CY2000=100)
%, External finance premium
Real borrowing (CY2000=100)
Dot-com bubbleDot-com bubble
Housing bubbleHousing bubble
The External Finance Premium and the Real Borrowing in Japan
October 20, 2010Kaihatsu and Kurozumi, Bank of Japan
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85:1Q
86:1Q
87:1Q
88:1Q
89:1Q
90:1Q
91:1Q
93:1Q
92:1Q
94:1Q
95:1Q
96:1Q97:1Q
98:1Q
0
1
2
3
4
60 70 80 90 100 110 120
%, External finance premium
Real borrowing (CY2000=100)
Asset price bubbleAsset price bubble
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Concluding Remarks
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In both U.S. and Japan, neutral technology shocks are the main driving force of output fluctuations.
Financial shocks are at least as important for investment fluctuations as technology shocks.
External finance premium shows a sharp decline and a subsequent hike, and thereby induce the boom and bust cycles of investment.
Future Direction of the Research
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Concerning sources of boom and bust cycles, recent studies such as Christiano et al. (2010) emphasize the role of news or anticipated shocks about future technological changes.
Which is the major source of boom and bust cycles, financial or technology news shocks?
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