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DO INVESTMENT‐SPECIFIC TECHNOLOGICAL CHANGES MATTER FOR BUSINESS FLUCTUATIONS? EVIDENCE FROM JAPAN
Author(s) -
HIROSE YASUO,
KUROZUMI TAKUSHI
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2012.00580.x
Subject(s) - economics , investment (military) , shock (circulatory) , consumption (sociology) , monetary economics , business cycle , dynamic stochastic general equilibrium , investment goods , technology shock , technological change , financial intermediary , return on investment , macroeconomics , production (economics) , monetary policy , politics , medicine , social science , sociology , political science , law
The observed decline in the relative price of investment goods to consumption goods in Japan suggests the existence of investment‐specific technological (IST) changes. We examine whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model using Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We find that the estimated series of the investment adjustment cost shock correlates strongly with the diffusion index of firms' financial position in the Tankan (Short‐term Economic Survey of Enterprises in Japan). Therefore, we argue that the large decline in investment growth in the early 1990s was due to an increase in investment adjustment costs stemming from firms' financial constraints after the collapse of Japan's asset price bubble.