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Sources of Business Fluctuations: Financial or Technology Shocks?

Author

Listed:
  • Sohei Kaihatsu

    (Bank of Japan)

  • Takushi Kurozumi

    (Bank of Japan)

Abstract

Despite the widespread belief that technology shocks are the main source of business fluctuations, recent empirical studies find that an investment efficiency shock mainly drives such fluctuations and reflects financial conditions for investment. This poses the question as to what is the major source of the fluctuations, financial or technology shocks. We thus incorporate a financial accelerator mechanism into a DSGE model with stochastic trends in neutral and investment-specific technological changes, and replace the investment efficiency shock with two financial shocks to the external finance premium and to entrepreneurs' net worth. This model is estimated by Bayesian methods with data including the relative price of investment and credit growth. We show that, in both Japan and the U.S., the main driving force of output fluctuations is neutral technology shocks, and financial shocks are at least as important for investment fluctuations as technology shocks. We also show that a sharp decline and a subsequent hike in the external finance premium, caused by shocks to this premium, induced the boom and bust cycles of investment via the financial accelerator mechanism during the late 1980s and the 1990s in Japan and since 2004 in the U.S.

Suggested Citation

  • Sohei Kaihatsu & Takushi Kurozumi, 2010. "Sources of Business Fluctuations: Financial or Technology Shocks?," Bank of Japan Working Paper Series 10-E-12, Bank of Japan.
    • Handle: RePEc:boj:bojwps:10-e-12
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    More about this item

    Keywords

    Business fluctuations; Financial accelerator; Trend in technological changes; External finance premium; Boom and bust cycle;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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