DOCSLIB.ORG

Download (Pdf)

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Download (Pdf) Fisherian and Wicksellian Price-Stabilization Models in the History of Monetary Thought If monfg bezame scarce, as shown by a L+m&myof the price kvel to foil, mom couhi be mpphd ins&&y; and if sup.mabunhnt, some co&i be with&awn m?h fquaZpmnzpbam. 72e money management wouki thus ctit . of buying Jiechies on t&eopen mar&tJ whenever the price kveZ thmmned to fai. behw th stiiuhtcd par and selling whentxm it thrzuotenedto rise above that par. -In&g F&k f3, p. si7J Tht intmt on bommed monq isjr one rzason or another either be&m or abwe the ltx& wbhb wouki norm@ be gwemed by t&e real rate m&g at t& time /isJ a cimmtame wbkb, so hng as it hsts, must cause a pmgmsive he or fall in prim . JTZusJ thm s/w&i be a commm policy, a raising or hmihg of bank ram . jwn time to time in order to akpms tire commodityprice hel wkn it showed a &znaknqto r& and to raise it -Knuc Wiu&dZ/17, pp. 225, 223J Introduction 1940s they constituted the dominant policy models in nineteenth and twentieth century central banking Central bankers charged with the responsibility for tradition. In fact, many celebrated economists stabilizing the general level of prices need to know before Fisher and Wicksell contributed to their at least two things. First, what causes prices to deviate development. from their desired fixed target level? Secondly, what policy rule or response most effectively corrects those Given the importance of price stability as a policy deviations and restores prices to target? goal, it is useful to reexamine these historical models. As simple, stripped-down prototypes of the more Historically, proponents of price stability de- elaborate macroeconomic models employed today, veloped two basic reduced-form models to answer they reveal in sharp focus much about the mechanics these questions. One model, associated with Irving of price-level stabilization. In particular, they provide Fisher, attributes price movements to shocks information on the relative price-stabilizing powers operating through excess money supply and demand. of alternative policy feedback rules-e.g., money It calls for money-stock adjustments to keep prices stock rules versus interest rate rules. Accordingly, at their target level. The other model, associated with the threefold purpose of this article is (1) to describe Knut Wicksell, ascribes price movements to dis- the structure and logic of the two reduced-form crepancies between market and natural (equilibrium) models, (2) to sketch their evolution in the history rates of interest. It prescribes interest-rate adjust- of monetary thought, and (3) to analyze each to see ments to restore prices to target. Although both if they yield dynamic stability such that prices return models are fairly well known, their historical to target equilibrium following economic shocks. The significance has not always been fully appreciated; central message is that both models, if properly Until the Keynesian revolution of the 1930s and formulated, still provide reliable guides to policy. FEDERAL RESERVE BANK OF RICHMOND 3 The Models Outlined ‘, ’ to rise or fall the central ,bank acts to restore them to target by raising or lowering the market rate in Before tracing the historical development of the proportion to prices’ deviation from target. Stated models, it is necessary to sketch their essential mathematically: : 1 ,. ~ . .. ‘:, features so as to identify what particular contributors _‘..a. had to say about each. As presented here, both (3) dP/dt = o(r -i) reduced-form models consist ,of (1) a price-change equation relating price movements to the variables (4) di/dt = @(P APT) ’ ’ that cause them and (2) a policy-response function specifying the feedback rule the central bank follows to keep prices on target. where r denotes the natural rate, i the market rate, di/dt its adjustment, and the other symbols are as Fisherian Model defined above. The Fisherian model says that prices rise or fall These reduced-form equations, are derived from when the existing quantity of money exceeds.or falls a larger model that explains how the interest rate short of the amount people wish to hold at prevail- differential affects, (1). real investment and saving, ing prices and real ‘incomes. It also says that (2) loan supply and demand, (3) money supply and policymakers can correct deviations of prices from demand, and (4) ‘aggregate supply and demand. target by expanding or contracting the money stock Through these factors the rate differential moves the (or at least its high-powered base component) as price level. prices are below or above their target level. In symbols: Thus when the loan rate lies below the natural rate (the rate that equilibrates saving and investment) in- (1) dP/dt = &(M -kPy) vestors demand more funds from banks than savers deposit there. Assuming banks accommodate these (2) dM/dt = @(Pr -P) extra loan demands by issuing notes .a$ creating checking deposits, a monetary expansion occurs. where dP/dt denotes price change;P actual prices, Since neither real income nor prices have changed Pr their fixed target level, M the money stock, dM/dt in cashholders’ money demand functions, the addi- its change, k the inverse of money’s turnover velocity tional money constitutes an excess supply of cash or the fraction of nominal income people wish to hold that spills over into the product market in the form in money, y real income, and o and fl positive of an excess demand for goods. This excess demand constants. puts upward pressure on prices which contrnue to rise until the rate differential vanishes. Since the Thus suppose a money-control error or decrease model in its pure credit or inside money version con- in money demand .produces an excess supply of tains no automatic self-equilibrating market money. The resulting attempts by cashholders to get mechanism to eliminate the rate differential, the cen- rid of the excess cash through spending puts upward tral bank must do the job. To arrest and reverse the pressure on prices according to equation 1. As prices price rise the bank must raise the market rate until begin to rise above target, the central bank responds prices return to target. by conuacting the money stock according to the feed- back-policy rule represented by equation 2. In this Of course if the central bank knew the level of the way the central bank eventually contracts the money natural rate it could always keep the market rate there stock sufficiently to restore prices to target. Such is and no price movements would occur. But the the underlying logic of the Fisherian model. essence of the Wicksellian model is that the natural rate is an unobservable variabie. that moves around Wicksellian Model under the impact of productivity shocks, techno- The alternative Wicksellian model attributes price logical progress, factor endowment changes, and movements to the differential between the natural other real disturbances that cause it to deviate from (equilibrium) and market rates of interest. Prices rise the market rate. In such circumstances the central when the market rate is below the unobservable bank does not know what the natural rate is. It knows natural rate, fall when the market rate exceeds the only that the resulting price level movements indicate natural rate, and remain unchanged at .a stationary that the market rate is not at its natural level and must level when the two rates coincide. When prices start be changed. That is, the bank must adjust the market 4 ECONOMIC REVIEW, MAY/JUNE 1990 rate in the same direction that prices are deviating Second, the fall in domestic prices P relative to given from target, ceasing only when they finally stabilii foreign (world) prices PW would generate a uade there. balance surplus B as cheaper domestic goods out- sold dearer foreign ones at home and abroad: Historical Evolution of the Models (6) B = /3(Pw-P). Having outlined the essential features of the two price-stabilization models, one can readily uace their Third, the trade surplus would be paid for by a com- evolution in the history of monetary thought. At least pensating inflow of monetary gold from abroad: four classical and neoclassical economists conuibuted to the development of the Fisherian model: David (7) B = dM/dt. Hume (1711-1776), David Ricardo (177%1823), Irving Fisher (1867-1947), and Lloyd Mints Substituting equation 7 into equation 6 yields (1888-1989). Likewise at least four monetary economists helped advance the Wicksellian model: (8) dM/dt = B(Pw -P) Henry Thornton ( 1760- 18 1S), Thomas Joplin (c.1790-1847), Knut Wicksell (1851-1926), and which implies that the domestic money stock adjusts Gustav Cassel (1866-1945). through specie flows until domestic prices stabilize at the fured level of world prices as required for David Hume balance-of-payments and monetary equilibria. Here The Fisherian model is much older than Irving is the Fisherian model with (1) world prices replac- Fisher. The origins of the model date back at least ing target prices and (2) the balance of payments to David Hume’s 1752 essay “Of the Balance of replacing the central bank as adjuster of the money Trade.” There Hume stated the gist of the model’s stock. equations, albeit in words rather than algebraic symbols (see Waterman 115, pp. 86-71). True, as David Ricardo noted below, he substituted the world gold price of Hume applied the model to a metallic or conver- goods Pw for target prices Pr in the model’s feed- tible currency regime. Ricardo, writing almost sixty back policy rule or money adjustment equation. He years later, extended Hume’s model to an incon- also assumed that corrective money stock adjust- vertible paper currency regime with floating exchange ments were achieved through international specie rates and a variable price of gold.
Load more

Recommended publications
  • Estimating the Effects of Fiscal Policy in OECD Countries
    Estimating the e®ects of ¯scal policy in OECD countries Roberto Perotti¤ This version: November 2004 Abstract This paper studies the e®ects of ¯scal policy on GDP, in°ation and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The e®ects of ¯scal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more e®ectively than spending increases. 3) The e®ects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these e®ects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive e®ects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small e®ects on in°ation. 6) Both the decline in the variance of the ¯scal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980. ¤IGIER - Universitµa Bocconi and Centre for Economic Policy Research. I thank Alberto Alesina, Olivier Blanchard, Fabio Canova, Zvi Eckstein, Jon Faust, Carlo Favero, Jordi Gal¶³, Daniel Gros, Bruce Hansen, Fumio Hayashi, Ilian Mihov, Chris Sims, Jim Stock and Mark Watson for helpful comments and suggestions.
    [Show full text]
  • Responsible for an Remaining Errors. the Research Reported Here Is
    NBER WORKING PAPER SERIES USE OF (TI-DoIN) VECTOR AUTOREGRESSIONS TO TEST UNCOVERED INTEREST PARITY Takatoshi Ito Working Paper No. 1193 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 198). The author is thankful to Thomas Sargent and Christopher Sims for various useful suggestions and discussions. Comments from Paul Evans, Fumio Hayashi, Robert Hodrick, Angelo Melino and Danny Quah were very helpful. Financial assistance from the Suntory Foundation and the National Bureau of Economic Research is grate- fully acknowledged. The author is thankful to Lenny Dendunnen for his excellent computational assistance. The author, however, is responsiblefor an remaining errors. The research reported here is part of the NBER's research programs in Financial Markets and MonetaryEconomicsand International Studies. Any opinions expressedare those of the author and not those of the National Bureau of Economic Research. NBER Working Paper !i1493 November 1984 Use of (Time—Domain) Vector Autoregressions to Test Uncovered Interest Parity ABSTRACT In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the interdependence of the domestic and international financial markets. Uncovered interest parity is stated as a null hypothesis that the current difference between the two interest rates is equal to the difference between the expected future (log of) exchange rate and the (log of) current spot exchange rate. Note that the VAR system will yield the expected future spot exchange rate as a k—step ahead unconditional prediction.
    [Show full text]
  • The Equity Premium and the One Percent∗
    The Equity Premium and the One Percent∗ Alexis Akira Today Kieran Walshz First draft: March 2014 This version: December 29, 2016 Abstract We show that in a general equilibrium model with heterogeneity in risk aversion or belief, shifting wealth from an agent who holds comparatively fewer stocks to one who holds more reduces the equity premium. Since empirically the rich hold more stocks than do the poor, the top income share should predict subsequent excess stock market returns. Consistent with our theory, we find that when the income share of top earners in the U.S. rises, subsequent one year market excess returns significantly de- cline. This negative relation is robust to (i) controlling for classic return predictors such as the price-dividend and consumption-wealth ratios, (ii) predicting out-of-sample, and (iii) instrumenting with changes in estate tax rates. Cross-country panel regressions suggest that the inverse rela- tion between inequality and returns also holds outside of the U.S., with stronger results in relatively closed economies (emerging markets) than in small open economies (Europe). Keywords: equity premium; heterogeneous risk aversion; return pre- diction; wealth distribution; international equity markets. JEL codes: D31, D52, D53, F30, G12, G17. 1 Introduction Does the wealth distribution matter for asset pricing? Intuition tells us that it does: as the rich get richer, they buy risky assets and drive up prices. In- deed, over a century ago prior to the advent of modern mathematical finance, Fisher (1910) argued that there is an intimate relationship between prices, the heterogeneity of agents in the economy, and booms and busts.
    [Show full text]
  • By Fumio Hayashi and Junko Koeda Hitotsubashi University, Japan, And
    EXITING FROM QE by Fumio Hayashi and Junko Koeda Hitotsubashi University, Japan, and National Bureau of Economic Research University of Tokyo February 2014 Abstract We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. There are two regimes, one of which is QE (quantitative easing). The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response and counter-factual analyses yield two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE can be expansionary. Keywords: quantitative easing, structural VAR, observable regimes, Taylor rule, impulse responses, Bank of Japan. We are grateful to James Hamilton, Yuzo Honda, Tatsuyoshi Okimoto, Etsuro Shioji, George Tauchen, and particularly Toni Braun for useful comments and suggestions. 1 1 Introduction and Summary Since the recent global financial crisis, central banks of major market economies have adopted quantitative easing, or QE, which is to allow reserves held by depository institutions far above the required level while keeping the policy rate very close to zero. This paper uses an SVAR (structural vector autoregression) to evaluate macroeconomic effects of QE. Reliably estimating such a time-series model is difficult because only several years have passed since the crisis. We are thus led to examine Japan, a country that has already accumulated a history of, by our count, 130 months of QE as of December 2012.
    [Show full text]
  • Fumio Hayashi: Econometrics Is Published by Princeton University Press and Copyrighted, © 2000, by Princeton University Press
    COPYRIGHT NOTICE: Fumio Hayashi: Econometrics is published by Princeton University Press and copyrighted, © 2000, by Princeton University Press. All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher, except for reading and browsing via the World Wide Web. Users are not permitted to mount this file on any network servers. For COURSE PACK and other PERMISSIONS, refer to entry on previous page. For more information, send e-mail to [email protected] Preface This book is designed to serve as the textbook for a first-year graduate course in econometrics. It has two distinguishing features. First, it covers a full range of techniques with the estimation method called the Generalized Method of Moments (GMM) as the organizing principle. I believe this unified approach is the most efficient way to cover the first-year materials in an accessible yet rigorous manner. Second, most chapters include a section examining in detail original applied arti- cles from such diverse fields in economics as industrial organization, labor, finance, international, and macroeconomics. So the reader will know how to use the tech- niques covered in the chapter and under what conditions they are applicable. Over the last several years, the lecture notes on which this book is based have been used at the University of Pennsylvania, Columbia University, Princeton Uni- versity, the University of Tokyo, Boston College, Harvard University, and Ohio State University. Students seem to like the book a lot.
    [Show full text]
  • Taxation and Corporate Investment: a Q-Theory Approach
    LAWRENCE H. SUMMERS Massachusetts Institute of Technology and National Bureau of Economic Research Taxation and Corporate Investment. A q-Theory Approach THE PAST DECADE has witnessed increasing concern over the level of business capital formation in the United States. By some measures there has been a sharp decline in the rate of capital formation, accompanied by a drastic reduction in the stock market's valuation of corporate assets. Measured in 1981 dollars, the Dow Jones average stood at almost 2000 in 1965. This decline in investment and market valuation has occurred in conjunction with the substantial changes in the effective taxation of capital income brought on by inflation. Although causal links among these developments have not been clearly established, a consensus in favor of some sort of tax incentive for business capital formation has emerged. At present, however, there is no solid basis for assessing the likely impact of any given menu of tax policies on the level of investment or on the distribution of income. This paper presents an analysis of the effects of tax policy on capital accumulation and valuation based on James Tobin's q theory of invest- ment. As Tobin has explained, aggregate investment can be expected to I am indebted to James Kahn and Andrei Shleifer for research assistance. I have benefited from discussions with Martin Feldstein, Stanley Fischer, David Lipton, Marcia Moore, James Poterba, and participants at the Brookings panel. This re- search was partially supported by the National Bureau of Economic Research as part of its project on capital formation. 0007-2303/81/0001-0067$01.00/0 ? Brookings Institution 68 Brookings Papers on Economic Activity, 1:1981 depend in a stable way on q, the ratio of the stock market valuation of existing capital to its replacement cost.
    [Show full text]
  • University of California Spring 2008
    This version: 8/26/2015 UNIVERSITY OF CALIFORNIA FALL 2015 Department of Economics Economics 202A P. Gourinchas/D. Romer MACROECONOMICS FIRST PART (D. ROMER) Part I: August 27–October 13 GSI and Office Hours: Evan Rose, office hours F 10:00–12:00, 640 Evans D. Romer office hours: W 1:00–3:00, 679 Evans I. Introduction: Current Crises in Macroeconomics *David Romer, Advanced Macroeconomics, fourth edition (New York: McGraw-Hill, 2012), “Epilogue,” 644–648. Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different, Chapter 14, “The Aftermath of Financial Crises” (Princeton: Princeton University Press, 2009), 223–239. Ben S. Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in Ryoichi Mikitani and Adam S. Posen, eds., Japan’s Financial Crisis and Its Parallels to U.S. Experience (Washington, D.C.: Institute for International Economics, 2000), 149–166. http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf *Lee E. Ohanian, “The Economic Crisis from a Neoclassical Perspective,” Journal of Economic Perspectives 24 (Fall 2010), 45–66. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.45 *Ricardo J. Caballero, “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome,” Journal of Economic Perspectives 24 (Fall 2010), 85–102. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.85 *David Romer, Advanced Macroeconomics, fourth edition, “Empirical Application: Is U.S. Fiscal Policy on a Sustainable Path?” 590–592. *Alan J. Auerbach and William G. Gale, “Forgotten But Not Gone: The Long-Term Fiscal Imbalance,” unpublished paper (September 2014). Tax Notes, forthcoming.
    [Show full text]
  • Syllabus for Econ 236B
    Economics 236B, Spring 2008. Applied macroeconomics Instructor: Yuriy Gorodnichenko Office: 693 Evans Hall Class Meets: Tue 4-6 pm, Evans 639 Office Hours: Tue 1-3pm or by appointment. Syllabus The main objective of the course is to introduce tools of applied macroeconomics. The emphasis is on econometric and computation techniques. Since the best way to learn tools is to practice them, you will be required to do a number of extensive exercises. The reading list is not designed to be comprehensive. Instead, it contains a few influential references for selected topics plus a selection of leading-edge treatment of the topics. You are expected to read the papers for discussion in advance and come prepared to discuss them. Note that I will not provide problem set solutions or extensive comments on individual problem sets. Basically, I will just make sure you did it. As a part of the regular homework assignments, I will also require you to write computer projects. The computer projects may be done in small groups (no more than three students per group), but each homework must be submitted individually. The programming language I use is MATLAB. You can use any language you like (GAUSS, FORTRAN90, C++, etc.), but I will give you assistance with MATLAB code only. Grade: – 15% = Three referee reports (four pages, 1.5 spaced). – 45% = Weekly homework assignments. Grading is check, check plus, check minus. Acceptable homework must have both report and code. The code should be self-contained so that anyone can run it. You should plan that each homework assignment takes about a day or more to complete.
    [Show full text]
  • Globalization of the Economy
    SELECTED READINGS Focus on: Christopher A. Sims January 2011 Selected Readings –January 2011 1 INDEX INTRODUCTION............................................................................................................. 8 1 DISCUSSION AND WORKING PAPERS .......................................................... 10 1.1 Christopher A. Sims, June 2010. “Rational Inattention and Monetary Economics”.......10 1.2 Christopher A. Sims, Revised version 2010. “A Rational Expectations Framework for Short Run Policy Analysis”. ................................................................................................................10 1.3 Christopher A. Sims, 2010. “Commentary: Commentary on Policy at the Zero Lower Bound”, International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 205-213, March...........................................................................................................10 1.4 Christopher A. Sims, 2010. “Understanding Non-Bayesians”. .........................................11 1.5 Christopher A. Sims, 2010. “Comment on Angrist and Pischke”......................................11 1.6 Christopher A. Sims and Filip Matejka, 2010. “Discrete Actions in Information- Constrained Tracking Problems”. ......................................................................................................11 1.7 Christopher A. Sims, 2010. “Price Level Determination in General Equilibrium”. ........12 1.8 Christopher A. Sims, 2009. “Fiscal/Monetary Coordination When the Anchor Cable
    [Show full text]
  • Curriculum Vitae
    JOSEPH G. ALTONJI August 2020 Mailing Address: Department of Economics Yale University 37 Hillhouse Ave PO Box 208264 New Haven, CT 06520-8264 FedEX, etc (No PO number) 37 Hillhouse Avenue New Haven CT 06511 Email: [email protected] Telephone: (203) 318-1533 (home) (203) 432-6285 (office) (847) 432-6323 (fax) Education: Yale University, B.A., Economics (cum laude with departmental honors), May 1975 Yale University, M.A., Economics, May 1975 Princeton University, (1976-1980), Ph.D., Economics, June 1981 Professional Experience: Thomas DeWitt Cuyler Professor of Economics, Yale University, July 2002-present Visiting Professor of Economics, Harvard University, July 2011-June 2012 Professor of Economics, Northwestern University, September 1990-August 2002 Associate Professor of Economics, Northwestern University, September 1986-August 1990. Faculty Fellow, Institute for Policy Research (formerly Center for Urban Affairs and Policy Research) , Northwestern University, September 1986-August 2002. Associate Director, Institute for Policy Research, September 1996-September 1997, September 1998- (Acting Director, September 1997- August 1998). Assistant Professor of Economics, Columbia University, July 1981-June 1986. Lecturer, Department of Economics, Columbia University, July 1980-July 1981. Visiting Assistant Professor of Economics, Princeton University, September 1984-June 1985. Visiting Research Associate, Industrial Relations Section, Princeton University, September 1984-August 1985. Research Associate, National Bureau of Economic Research,
    [Show full text]
  • Pdffile 31KB
    MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/FEBRUARY 2001 Introduction Kunio Okina, Hiroo Taguchi, and Shigenori Shiratsuka The theme of the Ninth International Conference organized by the Institute for Monetary and Economic Studies of the Bank of Japan was “The Role of Monetary Policy Under Low Inflation: Deflationary Shocks and Policy Responses,” and the conference was held on July 3 and 4, 2000. The purpose of this conference was to discuss the role that monetary policy can and should play when there are deflationary shocks, such as the collapse of an asset price bubble occurring in an environment of low inflation, the experience in Japan in the 1990s being a case in point. When inflation rates are low and nominal interest rates become close to zero, there are limits to the effectiveness of monetary policy through ordinary interest rate channels. While monetary policy will very likely depend heavily on expectation formation, how expectation will be formed in such circumstances is not very certain, since there are hardly any examples of such a situa- tion in modern economic history that we can learn from, with the exception of the Great Depression in the United States in the 1930s and the economic stagnation in Japan in the 1990s. However, there is no guarantee that these cases will remain remote outliers in the future, since most industrial economies have now opted for, and are achieving, low inflation. The organizers of this conference felt that it would be valuable to bring together the wisdom of both theoretical and empirical analysts, as well as policy makers, and ask them to focus on this challenging topic.
    [Show full text]
  • The Decline of Japan's Saving Rate and Demographic
    The Japanese Economic Review Vol. 57, No. 2, June 2006 THE DECLINE OF JAPAN’S SAVING RATE AND DEMOGRAPHIC EFFECTS* By MAIKO KOGA Bank of Japan This paper investigates the phenomenon in which Japan’s household saving rate showed a sharp decline even during the long stagnation period called “the lost decade.” Our empirical results show that the sharp decline in the saving rate in the 1990s can be explained by the significant impact of demographic factors. Furthermore, the estimated life cycle curve is hump shaped, meaning that the prediction of the life cycle model is confirmed with time series data on the Japanese saving rate. JEL Classifications: E21, E27. 1. Introduction The Japanese economy experienced a long stagnation called “the lost decade” and dampened consumption throughout the 1990s. However, the household saving rate also declined sharply during this period as shown in Figure 1. In this paper, we investigate the cause of this phenomenon by conducting an empirical analysis. There have been many empirical analyses in previous studies of the Japanese saving rate, (see, for example, Ando et al. (1986); Hayashi (1986); Hayashi et al. (1988); Ishikawa (1988); Horioka (1990); and Yashiro and Maeda (1994)). Those studies explored the background of the high saving rate before the sharp decline of the 1990s; the recent sharp decline in the saving rate makes it necessary to clarify the reasons for the decline from a time series perspective. We need to reexamine the relationship between this pheno- menon and the life cycle model because Japan has recently experienced a rapid ageing of its population.
    [Show full text]