Working Paper: CEPR ID: DP2436
Authors: Tamim Bayoumi
Abstract: This paper uses a VAR to investigate four possible explanations of the extended slump in Japanese economic activity over the 1990s: the absence of bold and consistent fiscal stimulus; the limited room for expansionary monetary policy due to a liquidity trap; overinvestment and debt overhang; and disruption of financial intermediation. The results indicate that all of these factors played a role, but that the major explanation is disruption in financial intermediation, largely operating through the impact of changes in domestic asset prices on bank lending.
Keywords: economic slump; financial intermediation
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of bold and consistent fiscal stimulus (E65) | output (C67) |
| fiscal contraction after September 1995 stimulus package (E65) | output (C67) |
| monetary policy effectiveness (E52) | output (C67) |
| real interest rate increase (E43) | output (C67) |
| domestic asset price changes (F31) | output gap dynamics (D57) |
| bank lending increases in response to rising land prices (G21) | output growth (O40) |
| falling asset prices (G19) | contraction in output (E23) |
| financial intermediation (G20) | impact of asset prices on the economy (E44) |
| asset prices (G19) | output (C67) |