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Letting the speculative and the news views of the Japanese business cycle compete

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  • Lilia Karnizova

    (University of Ottawa)

Abstract

This note uses a dynamic stochastic general equilibrium model with direct preferences for financial wealth to explore how stock price booms and busts relate to the real side of the economy. It evaluates the 'speculative' (sunspots) and 'news' (anticipated future changes in productivity) explanations of the Japanese stock market bubble and economic business cycle in 1986-1999. Depending on parameter configurations, the model yields either a unique equilibrium or multiple equilibria. The note calibrates two versions of the model: (i) a version with multiple equilibria, driven solely by sunspot shocks, and (ii) a version with a unique equilibrium, driven by surprise and news shocks to productivity. In both cases, expectations shocks are estimated to perfectly match the historical path of the Nikkei stock market average. Simulation results show that, from the perspective of the model, both the speculative and the news views can explain equally well empirical investment. The two views, however, differ in their predictions for consumption, output and real wages. These differences could be explored in further work on disentangling empirical importance of sunspot and news shocks.

Suggested Citation

  • Lilia Karnizova, 2013. "Letting the speculative and the news views of the Japanese business cycle compete," Economics Bulletin, AccessEcon, vol. 33(2), pages 1146-1158.
    • Handle: RePEc:ebl:ecbull:eb-12-00621
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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I2-P108.pdf
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    References listed on IDEAS

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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.

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    More about this item

    Keywords

    sunspots; news shocks; Japanese economy; business cycles; stock market; expectations; speculations; bubbles; investment;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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