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Working Paper
Banking globalization and international business cycles
This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking crossborder borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country ...
Working Paper
(A)symmetric Information Bubbles: Experimental Evidence
Asymmetric information has been necessary to explain a bubble in past theoretical models. This study experimentally analyzes traders? choices, with and without asymmetric information, based on the riding-bubble model. We show that traders have an incentive to hold a bubble asset for longer, thereby expanding the bubble in a market with symmetric, rather than asymmetric information. However, when traders are more experienced, the size of the bubble decreases, in which case bubbles do not arise, with symmetric information. In contrast, the size of the bubble is stable in a market with ...
Working Paper
The fiscal multiplier and spillover in a global liquidity trap
We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. ...
Working Paper
Product Turnover and the Cost of Living Index: Quality vs. Fashion Effects
This paper evaluates the effects of product turnover on a welfare-based cost-of-living index. We first present some facts about price and quantity changes over the product cycle employing scanner data for Japan for the years 1988-2013, which cover the deflationary period that started in the mid-1990s. We then develop a new methodology to decompose price changes at the time of product turnover into those due to the quality effect and those due to the fashion effect (i.e., the higher demand for products that are new). Our main findings are as follows: (1) the price and quantity of a new product ...
Working Paper
Aging and deflation from a fiscal perspective
Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of ...
Working Paper
Policy regime change against chronic deflation? Policy option under a long-term liquidity trap
This paper evaluates the role of the first arrow of Abenomics in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, a policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that the reaction of monetary policy to inflation has been declining since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained ...
Working Paper
Japan’s financial crises and lost decades
In this paper we explore the role of financial intermediation malfunction in macroeconomic fluctuations in Japan. To this end we estimate, using Japanese data, a financial accelerator model in which the balance sheet conditions of entrepreneurs in a goods-producing sector and those of a financial intermediary affect macroeconomic activity. We find that shocks to the balance sheets of the two sectors have been quantitatively playing important role in macroeconomic fluctuations by affecting lending rates and aggregate investments. Their impacts are prominent in particular during financial ...
Working Paper
Heterogeneous bank loan responses to monetary policy and bank capital shocks: a VAR analysis based on Japanese disaggregated data
In this paper, we study bank loan responses to monetary policy and bank capital shocks using Japan?s disaggregated data sorted by borrower firms? size and industry. Employing a block recursive VAR, we demonstrate that bank loan responses exhibit large sectoral heterogeneity. Among a broad range of indicators about borrower firms? characteristics, the heterogeneity is tightly linked to borrower firms? liability conditions. Firms with a lower capital ratio tend to experience larger drops in bank loans following a contractionary monetary policy shock and/or a negative bank capital shock. In ...
Working Paper
Is the net worth of financial intermediaries more important than that of non-financial firms?
To explore the relative macroeconomic importance of financial intermediaries' (FIs?) net worth to that of non-financial firms (entrepreneurs), we extend the financial accelerator model of Bernanke, et al. (1999), such that both FIs? and entrepreneurs rely on costly external debt. Our model, which is calibrated to the U.S. economy, highlights two features of the FIs? net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net- worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net ...
Working Paper
Do banking shocks matter for the U.S. economy?
The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment ...