Has the Government Lowered the Hours Worked? Evidence from Japan

Why does the hours worked show a decreasing pattern in the postwar Japanese economy? This paper answers this question in the background of the changing pattern of government spending and tax-imposing behaviors. We construct and simulate a standard optimal growth model with the following key features: various taxes and subsidies. Our main findings are as follows. First, we quantitatively find that the increasing pattern of taxes on labor income played a crucial role in influencing the declining pattern of hours worked in Japan. Second, consumption tax and subsidy have a limited role in explaining the labor supply because they cancel each other out. Third, pension benefit may influence the retirement of the people in their sixties but has a minor effect on the hours worked. Fourth, the legal reduction in the workweek length in 1990 can explain the low level of the hours worked since 1990. Fifth, subsistence consumption can account for the slope of hours worked but cannot explain the long-run level.marginal tax rate, subsidy, hours worked, pension benefit

Productivity shocks and housing market inflations in new Keynesian models

Econometric evidence suggests the existence of two dynamics in the postwar U.S. housing market: (i) housing rental and purchase prices co-move positively in response to productivity shocks, and (ii) the purchase price exhibits much larger volatile movements than the rental price in response to the shocks. A standard New Keynesian model with nominal rigidity in the production sector is inconsistent with these facts. We incorporate a rental market into an otherwise standard New Keynesian model with durables and show that nominal rigidity in the rental market contributes to our empirical findings.Productivity shock; price-rent ratio; housing prices

Optimal monetary policy with durable services: user cost versus purchase price

This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability.Durables; User cost; Price-rent ratio; Optimal monetary policy

Fiscal Policy under the Debt Feedback Rule: The Case of Japan

The Japanese government has amassed a huge amount of gross public debts over the past several decades. However, previous empirical works dealing with vector auto-regression (VAR) have not considered the effect of debt on fiscal policy and the macro economy. In this paper, we incorporate debt dynamics in a VAR model in the spirit of Favero and Giavazzi (2007, 2011). The inclusion of the debt feedback rule in VAR can help overcome the misspecification problem and provide direction toward a more relevant debt path and fiscal stance. The main findings of our study are as follows. First, in the pre-bubble period, the fiscal authority in Japan increased the primary surplus when the public debt level was high. However, this Ricardian behavior was not seen in the post-bubble period. Second, the impulse response functions to the expansionary government spending shock reveal that the stance of fiscal policy was more active in the pre-bubble. Third, while the forecast of debt dynamics in the pre-bubble period was stable, it became explosive in the post-bubble period.fiscal policy, Japan's public debt, VAR

Has the Government Lowered the Hours Worked? Evidence from Japan

Why does the hours worked show a decreasing pattern in the postwar Japanese economy? This paper answers this question in the background of the changing pattern of government spending and tax-imposing behaviors. We construct and simulate a standard optimal growth model with the following key features: various taxes and subsidies. Our main findings are as follows. First, we quantitatively find that the increasing pattern of taxes on labor income played a crucial role in influencing the declining pattern of hours worked in Japan. Second, consumption tax and subsidy have a limited role in explaining the labor supply because they cancel each other out. Third, pension benefit may influence the retirement of the people in their sixties but has a minor effect on the hours worked. Fourth, the legal reduction in the workweek length in 1990 can explain the low level of the hours worked since 1990. Fifth, subsistence consumption can account for the slope of hours worked but cannot explain the long-run level

Optimal monetary policy with durable services: user cost versus purchase price

This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability

Productivity shocks and housing market inflations in new Keynesian models

Econometric evidence suggests the existence of two dynamics in the postwar U.S. housing market: (i) housing rental and purchase prices co-move positively in response to productivity shocks, and (ii) the purchase price exhibits much larger volatile movements than the rental price in response to the shocks. A standard New Keynesian model with nominal rigidity in the production sector is inconsistent with these facts. We incorporate a rental market into an otherwise standard New Keynesian model with durables and show that nominal rigidity in the rental market contributes to our empirical findings

Has the Government Lowered the Hours Worked? Evidence from Japan

Why does the hours worked show a decreasing pattern in the postwar Japanese economy? This paper answers this question in the background of the changing pattern of government spending and tax-imposing behaviors. We construct and simulate a standard optimal growth model with the following key features: various taxes and subsidies. Our main findings are as follows. First, we quantitatively find that the increasing pattern of taxes on labor income played a crucial role in influencing the declining pattern of hours worked in Japan. Second, consumption tax and subsidy have a limited role in explaining the labor supply because they cancel each other out. Third, pension benefit may influence the retirement of the people in their sixties but has a minor effect on the hours worked. Fourth, the legal reduction in the workweek length in 1990 can explain the low level of the hours worked since 1990. Fifth, subsistence consumption can account for the slope of hours worked but cannot explain the long-run level

On the Sources of the Feldstein-Horioka Puzzle across Time and Frequencies

There are several candidate explanations for the Feldstein--Horioka puzzle. This paper provides a quantitative assessment of the relative role of the existing explanations for saving--investment comovement performing time-frequency domain analysis for nine countries from 1885 to 2010. The main findings are summarized as follows. First, in large economies, such as the US and Italy, to a greater extent high correlations between saving and investment are observed than in middle-sized and small countries. Second, we obtain two groups of countries in terms of time-changing patterns of correlations: U-shaped and decreasing patterns of capital mobility. Third, fiscal balance seems to be most related to positive saving-investment correlations in many countries. Fourth, a global common factor also plays an important role in explaining the Feldstein-Horioka puzzle

On the Sources of the Feldstein-Horioka Puzzle across Time and Frequencies

There are several candidate explanations for the Feldstein--Horioka puzzle. This paper provides a quantitative assessment of the relative role of the existing explanations for saving--investment comovement performing time-frequency domain analysis for nine countries from 1885 to 2010. The main findings are summarized as follows. First, in large economies, such as the US and Italy, to a greater extent high correlations between saving and investment are observed than in middle-sized and small countries. Second, we obtain two groups of countries in terms of time-changing patterns of correlations: U-shaped and decreasing patterns of capital mobility. Third, fiscal balance seems to be most related to positive saving-investment correlations in many countries. Fourth, a global common factor also plays an important role in explaining the Feldstein-Horioka puzzle