Asset Price Bubbles in the Kiyotaki-Moore Model

We examine the effect of asset price bubbles in the Kiyotaki-Moore model. We show that the dynamic interactions between bubble-asset price, land price, and output generate powerful bubbly dynamics. The boom-bust cycles in bubble-asset price cause boom-crash cycles in the land market simultaneously, like a contagion by affecting the fundamentals of land. We also numerically analyze the welfare effects of bubbles in transitional dynamics.Bubbly Dynamics, Contagion, Welfare Effects of Bubbles

Online Appendices to "An application of business cycle accounting with misspecified wedges"

Online appendices for the Review of Economic Dynamics article

Business Cycle Accounting for the Japanese Economy Using the Parameterized Expectations Algorithm

We propose an application of the parameterized expectations algorithm (PEA) to business cycle accounting (BCA). The PEA has an advantage in that it is simple and easier to understand and implement than the other non-linear solution methods for the dynamic stochastic general equilibrium model. Moreover, we apply BCA to the Japanese economy using the PEA which relaxes the perfect foresight assumption and show that the result is similar to the main result in the deterministic BCA by Kobayashi and Inaba (2006). The effects of the investment wedge are not a significant cause of the persistent recession during the 1990s. The output due to the efficiency wedge roughly replicates actual output, while the discrepancy widened during the 1990s. The labor wedge had a large depressing effect on output during 1989-2005. The efficiency wedge explains the recent economic recovery.

Business cycle accounting for the Japanese economy using the parameterized expectations algorithm

We propose an application of the parameterized expectations algorithm (PEA) to business cycle accounting (BCA). The PEA has an advantage in that it is simple and easier to understand and implement than other non-linear solution methods for a dynamic stochastic general equilibrium model. Moreover, we apply BCA to the Japanese economy using the PEA, which relaxes the perfect foresight assumption and yields a result similar to the main finding of deterministic BCA by Kobayashi and Inaba (2006). The effects of the investment wedge are not a significant cause of the persistent recession during the 1990s. The output derived from the efficiency wedge roughly replicates actual output, while the discrepancy widened during the 1990s. The labor wedge had a significant depressing effect on output during 1989-2005. The efficiency wedge explains the recent economic recovery

On Equivalence Results in Business Cycle Accounting

Business cycle accounting rests on the insight that the prototype neoclassical growth model with time-varying wedges can achieve the same allocation generated by a large class of frictional models: equivalence results. Equivalence results are shown under general conditions about the process of wedges while it is often specified to be the first order vector autoregressive when one applies business cycle accounting to actual data. In this paper, we characterize the class of models covered by the prototype model under the conventional first order vector autoregressive specification of wedges and find that it is much smaller than that believed in previous literature. We also apply business cycle accounting to an artificial economy where the equivalence does not hold and provide a numerical example that business cycle accounting works well even in such an economy.

An Application of Business Cycle Accounting with Misspecified Wedges

It is often assumed that wedges evolve according to the VAR (1) in the applications of business cycle accounting (BCA). However, recent research finds that the wedges have no VAR (1) representation in many dynamic stochastic general equilibrium(DSGE) economies, and that there might be a misspecification of the stochastic process of wedges. In order to assess the empirical usefulness of BCA, we apply BCA to a widely used medium-scale DSGE economy. Based on our experiments, we find that the accuracy of the measurement of wedges is high enough to capture the business cycle implications of wedges.

Borrowing constraints and protracted recessions

This paper shows that some of the puzzling observations in the protracted recessions of the 1990s in Japan and the 1930s in the United States can be accounted for by a simple variant of the neoclassical growth model with borrowing constraints. There are three puzzles: First, a large wedge emerged between the marginal rate of substitution between consumption and leisure and the marginal product of labor. This labor wedge is associated with declines in labor inputs. Second, although shrinkage of investment was observed in both episodes, a wedge that represents investment frictions did not emerge. Third, in spite of unprecedented monetary easing in Japan since the late 1990s, deflation has continued. A key ingredient is the emergence of a huge accumulation of nonperforming debts, which must have been a consequence of the large fluctuations in asset prices. The debts tighten the borrowing constraints and can cause the puzzling features of the recessions, which may be protracted if the bad debt problem persists for years.

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of the representative models with investment frictions. Based on our findings, BCA leads us to conclude that models with investment wedges are not promising according to the criteria of BCA, even though the true model contains investment frictions.

Business Cycle Accounting for the Japanese Economy

We conducted business cycle accounting (BCA) using the method developed by Chari, Kehoe, and McGrattan (2002a) on data from the 1980s--1990s in Japan and from the interwar period in Japan and the United States. The contribution of this paper is twofold. First, we find that labor wedges may have been a major contributor to the decade-long recession in the 1990s in Japan. We argue that the deterioration of the labor wedge may have been caused by sticky wages and monetary contraction, and it may have been prolonged by the continuation of asset-price declines through binding collateral constraints. Second, we performed an alternative BCA exercise using the capital wedge instead of the investment wedge to check the robustness of BCA implications for financial frictions. The accounting results with the capital wedge imply that financial frictions may have had a large depressive effect during the 1930s in the United States. This implication is the opposite of that from the original BCA findings.

"Irrational exuberance" in the Pigou cycle under collateral constraints

The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations, which is called the Pigou cycle by Beaudry and Portier (An exploration into Pigou's theory of cycles, Journal of Monetary Economics, 2004). The key feature of the notion of the Pigou cycle is the comovements in the consumption, the labor, and the investment, in response to changes in expectations. We show that with the assumption that firms are subject to the collateral constraint in financing labor input (and investment), a fairly standard neoclassical model can generate the Pigou cycle. We also show that the collateral-constraint model with the private information can generate the "irrational exuberance," i.e., a boom in which each firm correctly anticipates that its own productivity will not rise, while it also believes wrongly that the productivity of the other firms will rise dramatically.