Business cycles in Japan: An empirical investigation of the period 1980 to 2000

My thesis investigates the causes of business cycle fluctuations experienced by Japanese economy over the period 1980 to 2000.; First, I apply the Business Cycle Accounting procedure to Japanese data to help isolate frictions that look promising for quantitative accounting of business cycle fluctuations in Japan. The key idea is that a large class of models is equivalent to a prototype growth model with time-varying wedges that resemble time-varying productivity, labor taxes, and capital income taxes. I use data to measure these wedges, and then feed their measured values back into the model to assess the fraction of fluctuations in output, employment, and investment accounted for by these wedges. I find that efficiency and investment wedges significantly account for business cycle fluctuations in Japan but labor wedge is not very important.; Next, I build a quantitative model where business cycle fluctuations are the result of efficiency and investment frictions. I identify TFP fluctuations and land tax changes as possible sources of external frictions. My idea is that given a strong preference for debt-financing and widespread use of land as collateral in Japan, external frictions cause fluctuations in land prices that have an amplified impact on output and investment through fluctuations in borrowing capacity of firms. I use a dynamic general equilibrium model with endogenous borrowing constraints where land aside from being used for residential and commercial purposes, also serves as collateral. I calibrate the model using Japanese data and feed in observed TFP and land taxes in various combinations to assess the fraction of fluctuations in output and land prices accounted for by TFP and land tax fluctuations. I find that TFP and land tax fluctuations can significantly account for observed fluctuations in output, but cannot account for land price fluctuations unless agents expect land tax changes to be permanent. I further identify redistribution of land holding between commercial and residential uses in response to external fluctuations as an important channel through which the effect of these fluctuations on output gets amplified. Observed data of land use in Japan provides evidence of such redistribution.