Two essays on major macroeconomic shocks in the Japanese economy: demographic shocks and financial shocks

2013-11-05This dissertation consists of two essays on major macroeconomic shocks in the Japanese economy: demographic shocks in a long run trend and financial shocks in short run fluctuations. In the first essay, I explore quantitatively the macroeconomic impact of population aging on economic growth and fiscal variables in recent and future years. To this end, I construct a full-fledged overlapping generations (OG) model. The model replicates successfully the actual paths of macroeconomic variables from the 1980s to the 2000s. I find that Japan's population aging as a whole adversely affects GNP growth by dampening factor inputs. It also negatively impacts on GNP per capita and fiscal variables, especially in the future, mainly due to the decline in the fraction of the population of working-age. For these findings, fertility rate decline plays a dominant role as it reduces both labor force and saver populations. The effects of increased longevity on GNP growth are expansionary, but relatively small. My simulations predict that the adverse effects will expand during the next few decades, although they are minimal in the 1990s because the positive effects of increased longevity seem to compensate sufficiently for the negative effects of fertility rate decline. In addition to closed economy simulations, I examine the macroeconomic consequences of population aging in a small open economy setting. In this case a decline in the domestic capital return encourages investment in foreign capital, mitigating the adverse effects of population aging on GNP. ❧ In the second essay, I investigate empirically the relative importance of financial shocks and frictions for Japan's business cycles over the period 1980.1Q to 2009.4Q. To this end, I employ a variant of RBC model that incorporates explicitly firms' financing constraint. This model exhibits reasonably good performance in reproducing Japan's business cycle properties. I find that short run fluctuations in output, investment, and labor are significantly influenced by a 'financial shock' on firms' borrowing constraint. Especially, a negative shock on firms' financing has significant effects on the recessions in 1994 after the collapse of an asset price bubble, in 1999 with an aftermath of the Asian financial crisis, and during 2002-04 when domestic banks had severe bad-loan problems. Considerable parts of medium and long run variations in those variables are still explained by the leisure preference shock which is intended to capture labor fluctuations induced by other frictions and rigidity than firms' financial conditions. This result suggests that, as is pointed out by a few previous studies, there exist other important sources of distortion in the Japanese labor market