Working Paper: CEPR ID: DP7269
Authors: John Muellbauer; Keiko Murata
Abstract: This paper documents the role of consumption in explaining the weak interest rate effect of monetary transmission in Japan. Economic theory suggests circumstances in which a rise in short term real interest rates can increase consumption, contrary to much conventional wisdom. This paper suggests that these circumstances are more likely to be prevalent in Japan and finds strong empirical evidence for a positive effect. Life-cycle theory also suggests that housing wealth effects on aggregate consumption including imputed rent are small and negative. Positive effects of the kind found in the UK and the US are due to the role of the credit channel. In countries where consumer access to credit is restricted, these restrictions can enhance the negative effect on consumption of higher house prices because saving for a housing deposit needs to be higher. Our evidence of a negative land price effect for Japan supports this hypothesis. We find no evidence of significant household credit market liberalization from a model for household debt in Japan. We also find evidence for a sizable negative effect on consumption from higher government deficits, suggesting fiscal policy also had limitations. These findings contribute to explanations of Japan's 'lost decade'.
Keywords: interest rate effect on consumption; Japan's lost decade; land prices and consumption; monetary transmission in Japan
JEL Codes: E21; E32; E44; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term real interest rates (E43) | consumption (E21) |
| rising land prices (R31) | consumption (E21) |
| government deficits (H62) | consumption (E21) |