EXPLAINING JAPAN'S GREAT STAGNATION: AN INQUIRY USING VECTOR AUTOREGRESSION MODELS(in Japanese)

Japan's economic growth rate has dropped from three percent in the first half of the 1980s to one percent in the 1990s. We can call this decline the "Great Stagnation." In spite of its importance, there is no agreement on what caused the Great Stagnation. First, we briefly surveyed various proposed explanations. They are 1) the bubble hypothesis-that the bubble and its subsequent burst caused the long slump; 2) the efficiency shock hypothesis-that certain structural problems decreased the efficiency of the Japanese economy in the 1990s; 3) the fiscal policy hypothesis-that insufficient government expenditure impeded economic recovery; 4) the financial system hypothesis-that the decline of function of the financial system hampered economic growth; and 5) the monetary policy hypothesis-that insufficient monetary expansion caused the slump. Second, we excluded some explanations, and focused on several hypotheses based on economic reasoning and facts. One additional step is needed, however, to apply a VAR (Vector Autoregression) model to this problem, because a VAR model cannot include many variables in case that sample size is limited. Third, we constructed a VAR model to test the remaining hypotheses. The results basically suggest that monetary factors explain a significant part of the decline of trend growth, and that the decline of function of the financial system was not important, even though exports and fiscal expenditure play some role.