Federal Reserve Bank of Richmond
Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan
We study the dynamics of consumption, the real interest rate, and measures of labor input in Japan over the period from 1985-2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the Generalized Methods of Moments shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions. Specifically, following the tax hike and during the low nominal rate period, Japanese households became less risk averse and exhibited a higher degree of habit formation.
Cite this item
Jonathan Lecznar & Thomas A. Lubik, Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan, Federal Reserve Bank of Richmond, Working Paper 17-8, 18 May 2017.
- C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
Keywords: Euler equation; GMM; nominal interest rate; labor supply
This item with handle RePEc:fip:fedrwp:17-08
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