Appropriation Problem, Money Demand, and Japan’s Stagnation

This paper offers a simple dynamic macroeconomic model to provide a new explanation to the co-existence of the following macroeconomic phenomena observed during Japan’s stagnation since the early 1990s: the drastic rise in Marshall’s k, the drastic fall in household savings, the drastic rise in corporate savings (following their drastic fall in 1980s), and the drastic fall in real growth rate. Our extension of the standard macroeconomic model is the explicit incorporation of the conflict between corporate insiders (corporate managers and/or employees) and outside investors (households) in Japanese corporations. Specifically, in the model we assume that insiders may appropriate part of capital returns which should intrinsically accrue to outsiders. Under this circumstance, we show that outsiders restrain themselves from the investment in productive but appropriable capital and promote the holdings of non-productive but non-appropriable money. Meanwhile, reacting to this portfolio change of outsiders, insiders increase the capital investment using the corporate savings since the amount of outsiders’ capital returns which they can appropriate decreases. However, the increase in the capital investment of insiders is not large enough to compensate the decrease in that of outsiders, so that the economic growth rate falls. Our model can hence describe the macroeconomic phenomena observed during Japan’s stagnation in a single optimizing framework