Trends, Cycles and Lost Decades: Decomposition from a DSGE Model with Endogenous Growth

Hasumi, Ryo and Iibsoshi, Hirokuni and Nakamura, Daisuke (2018): Trends, Cycles and Lost Decades: Decomposition from a DSGE Model with Endogenous Growth. Forthcoming in: Japan & the World Economy

Abstract

In this paper we incorporate endogenous productivity growth into a medium-scale new Keynesian dynamic stochastic general equilibrium (DSGE) model, to which a new shock regarding R&D activities is added. By matching the model parameters to the Japanese economy from 1980:Q2 to 2013:Q4 and decomposing the output into trend and cycle components, we find that the stagnation of the so-called lost decades was caused by a decline in economic growth as well as major recessions in the business cycle. The common trend estimated by our model is based on multiple time series data and is much more volatile than the trend extracted by either the Hodrick-Prescott or the band-pass filter.

• Item Type: MPRA Paper
• Language: English
• Keywords: endogenous TFP growth, New Keynesian DSGE, trend shift, technological change
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Adolfson, M., S. Las´een, J. Lind´e, and M. Villani (2007) ‘Bayesian estimation of an open economy dsge model with incomplete pass-through.’ Journal of International Economics 72(2), 481–511.

Altig, David, Lawrence J. Christiano, Martin Eichenbaum, and Jesper Linde (2011) ‘Firm-specific capital, nominal rigidities and the business cycle.’ Review of Economic dynamics 14(2), 225–247. Bank of Japan Working Paper Series

Christiano, Lawrence J., and Terry J. Fitzgerald (2003) ‘The band pass filter.’ International Economic Review 44(2), 435–465

Christiano, Lawrence J., Mathias Trabandt, and Karl Walentin (2011) ‘Introducing financial frictions and unemployment into a small open economy model.’ Journal of Economic Dynamics and Control 35(12), 1999–2041

Comin, Diego, and Mark Gertler (2006) ‘Medium-term business cycles.’ The American Economic Review 96(3), 523–551

Gelman, Andrew, and Donald B. Rubin (1992) ‘Inference from iterative simulation using multiple sequences.’ Statistical Science 7(4), 457–472

Geweke, John (1999) ‘Using simulation methods for bayesian econometric models: Inference, development, and communication.’ Econometric Reviews 18(1), 1–73

Guerron-Quintana, P., and R. Jinnai (2015) ‘Liquidity shocks and asset prices.’ mimeo

Guerron-Quintana, P., T. Hirano, and R. Jinnai (2016) ‘Bubbles and trends.’ mimeo

Hayashi, Fumio, and Edward C. Prescott (2002) ‘The 1990s in japan: A lost decade.’ Review of Economic Dynamics 5(1), 206–235

Hirose, Yasuo, and Atsushi Inoue (2016) ‘The zero lower bound and parameter bias in an estimated dsge model.’ Journal of Applied Econometrics 31(4), 630–651

Iiboshi, Hirokuni, Tatsuyoshi Matsumae, Ryoichi Namba, and Shin-Ichi Nishiyama (2015) ‘Estimating a dsge model for japan in a data-rich environment.’ Journal of the Japanese and International Economies 36, 25–55

Ikeda, Daisuke, and Takushi Kurozumi (2014) ‘Post-crisis slow recovery and monetary policy.’ IMES Discussion Paper Series, no. 2014-E-16

Ikeda, Daisuke, and Yasuko Morita (2016) ‘The effects of barriers to technology adoption on japanese prewar and postwar economic growth.’ IMES Discussion Paper Series, no. 2016-E-1

Justiniano, Alejandro, Giorgio E. Primiceri, and Andrea Tambalotti (2010) ‘Investment shocks and business cycles.’ Journal of Monetary Economics 57(2), 132–145

Kaihatsu, Sohei, and Takushi Kurozumi (2014) ‘Sources of business fluctuations: Financial or technology shocks?’ Review of Economic Dynamics 17(2), 224–242

King, Robert G., Charles I. Plosser, James H. Stock, and MarkW.Watson (1991) ‘Stochastic trends and economic fluctuations.’ The American Economic Review 81(4), 819–840 Romer, Paul M (1990) ‘Endogenous technological change.’ Journal of Political Economy, 98(5), 71–102

Sugo, Tomohiro, and Kozo Ueda (2008) ‘Estimating a dynamic stochastic general equilibrium model for japan.’ Journal of the Japanese and International Economies, 22(4), 476–502 40