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.

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Sohei Kaihatsu Takushi Kurozumi Monetary Affairs Department, Bank of Japan

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Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Sohei KaihatsuTakushi KurozumiMonetary Affairs Department, Bank of Japan

Sources of Business Fluctuations:

Financial or Technology Shocks?

Central Bank Macroeconomic Modeling Workshop

Manila, Philippines

October 20, 2010

The views expressed herein are those of the authors and should not beinterpreted as those of the Bank of Japan.


Business fluctuations

Business Fluctuations

What is the source of economic fluctuations?

Level of output

Growth Trend

Time

Kaihatsu and Kurozumi, Bank of Japan


Question addressed

Question Addressed

  • 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?

Kaihatsu and Kurozumi, Bank of Japan


Answer our empirical findings

Answer: Our Empirical Findings

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Our approach

Our Approach

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Related Studies

Kaihatsu and Kurozumi, Bank of Japan


Investment efficiency shocks in u s

Investment efficiency shocks in U.S.

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Investment efficiency shocks in u s cont

Investment efficiency shocks in U.S.(cont.)

Level of output

Stochastic Growth Trend

Time

Technological Changes

Kaihatsu and Kurozumi, Bank of Japan


Investment efficiency shocks in u s cont1

Investment efficiency shocks in U.S.(cont.)

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Investment efficiency shocks in japan

Investment efficiency shocks in Japan

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Financial shocks in a financial accelerator mechanism

Financial Shocks in a Financial Accelerator Mechanism

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Our contribution

Our Contribution

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

The Model

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Outline of the model

Outline of the Model

External Finance

Capital

Entrepreneur

Production

Financial Intermediary

Retailer

Capital-Good Firm

Labor

Investment

Retailing

Deposit

Household

Consumption-Good Firm

Investment-Good Firm

Consumption

Production

Monetary Policy

Net Export Government

Central Bank

Kaihatsu and Kurozumi, Bank of Japan


Outline of the model1

Outline of the Model

Net worth shock

External Finance

Capital

Entrepreneur

Financial Accelerator

External finance premium shock

Investment Trend

Production

Financial Intermediary

Retailer

Capital-Good Firm

Labor

Investment

Retailing

Deposit

Household

Consumption-Good Firm

Investment-Good Firm

Consumption

Production

Investment-specific technology shock

Monetary Policy

Net Export Government

Central Bank

Kaihatsu and Kurozumi, Bank of Japan


Outline of the model2

Outline of the Model

Net worth shock

Neutral technology shock

External Finance

Capital

Entrepreneur

External finance premium shock

Production

Retailers’ markup shock

Financial Intermediary

Retailer

Capital-Good Firm

Labor

Investment

Retailing

Deposit

Wage markup shock

Household

Consumption-Good Firm

Investment-Good Firm

Consumption

Production

Investment-specific technology shock

Investment-good price markup shock

Monetary Policy

Preferences shock

Net Export Government

Central Bank

Exogenous demand shock

Monetary policy shock

Kaihatsu and Kurozumi, Bank of Japan


External finance premium

External Finance Premium

The real borrowing rate is

External finance premium

Entrepreneurs’

leverage ratio

  • External finance premium shock boosts the external finance premium beyond the level warranted by the current economic conditions.

Policy rate

External finance premium shock

Kaihatsu and Kurozumi, Bank of Japan


Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Estimation Strategy

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Estimation strategy

Estimation Strategy

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Ten shocks

Ten Shocks

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Ten quarterly time series

Ten Quarterly Time Series

Sample periods: U.S. 1985:1Q-2008:4Q Japan 1981:1Q-1998:4Q

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Measurement equations

Measurement Equations

Investment-specific technology shock

Balanced growth rate

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Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Empirical Analysis

Parameter Estimates

Historical/Variance Decompositions

External Finance and Boom-Bust Cycles

Kaihatsu and Kurozumi, Bank of Japan


Parameter estimates u s

Parameter Estimates: U.S.

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Parameter estimates japan

Parameter Estimates: Japan

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Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Empirical Analysis

Parameter Estimates

Historical/Variance Decompositions

External Finance and Boom-Bust Cycles

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of u s output growth

Historical Decomposition of U.S.Output Growth

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of u s investment growth

Historical Decomposition of U.S.Investment Growth

Kaihatsu and Kurozumi, Bank of Japan


Variance decompositions u s

Variance Decompositions: U.S.

Neutral technology

External finance premium

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of japan s output growth

Historical Decomposition of Japan’s Output Growth

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of japan s investment growth

Historical Decomposition of Japan’s Investment Growth

Kaihatsu and Kurozumi, Bank of Japan


Variance decompositions japan

Variance Decompositions: Japan

Neutral technology

External finance premium

Kaihatsu and Kurozumi, Bank of Japan


Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Empirical Analysis

Parameter Estimates

Historical/Variance Decompositions

External Finance and Boom-Bust Cycles

Kaihatsu and Kurozumi, Bank of Japan


The estimated external finance premium in the u s

The Estimated External Finance Premium in the U.S.

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of u s external finance premium

Historical Decomposition of U.S.External Finance Premium

Kaihatsu and Kurozumi, Bank of Japan


The estimated external finance premium in japan

The Estimated External Finance Premium in Japan

Kaihatsu and Kurozumi, Bank of Japan


Historical decomposition of japan s external finance premium

Historical Decomposition of Japan’s External Finance Premium

Kaihatsu and Kurozumi, Bank of Japan


The external finance premium and the real borrowing in u s

The External Finance Premium and the Real Borrowing in U.S.

Dot-com bubble

Housing bubble

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The external finance premium and the real borrowing in japan

The External Finance Premium and the Real Borrowing in Japan

Asset price bubble

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Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

Concluding Remarks

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Concluding remarks

Concluding Remarks

  • 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.

Kaihatsu and Kurozumi, Bank of Japan


Future direction of the research

Future Direction of the Research

  • 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?

Kaihatsu and Kurozumi, Bank of Japan


Sohei kaihatsu takushi kurozumi monetary affairs department bank of japan

End of Slides, Thank you.

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