Working Paper: CEPR ID: DP7608
Authors: Fabio Canova; Tobias Menz
Abstract: We study the contribution of the stock of money to the macroeconomic outcomes of the 1990s in Japan using a small scale structural model. Likelihood-based estimates of the parameters are provided and time stabilities of the structural relationships analyzed. Real balances are statistically important for output and inflation fluctuations and their role has changed over time. Models which give money no role give a distorted representation of the sources of cyclical fluctuations. The severe stagnation and the long deflation are driven by different causes.
Keywords: Deflation; Japan's Lost Decade; Money; Structural Model
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money (E42) | cyclical fluctuations in output (E32) |
| money (E42) | cyclical fluctuations in inflation (E31) |
| money (E42) | marginal rate of substitution (D11) |
| money (E42) | intertemporal rate of substitution (D15) |
| slow expansion of money (E51) | transformation of downturn into output stagnation (P27) |
| shocks affecting intertemporal marginal rates of substitution (D15) | output stagnation (P24) |
| shocks altering marginal costs (E39) | inflation movements (E31) |