Productivity Slowdown in Japan's Lost Decades: How Much of It Can Be Attributed to Damaged Balance Sheets?

After the global financial crisis, slowdowns of total factor productivity (TFP), often measured as the Solow residual, have been observed across major countries. This study offers an explanation for this by focusing on Japan's financial crises during the 1990s. We first incorporate credit const...

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Bibliographic Details
Published in:Oxford bulletin of economics and statistics 2023-02, Vol.85 (1), p.159-207
Main Authors: Muto, Ichiro, Sudo, Nao, Yoneyama, Shunichi
Format: Article
Language:English
Subjects:
Economic crisis
Productivity
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Summary:After the global financial crisis, slowdowns of total factor productivity (TFP), often measured as the Solow residual, have been observed across major countries. This study offers an explanation for this by focusing on Japan's financial crises during the 1990s. We first incorporate credit constraints, for financial intermediaries (FIs) and firms, and input–output structure into the standard New Keynesian model, and show that the model delivers multiple channels through which damaged balance sheets reduce measured TFP. We then estimate the model using Japanese data, and show that adverse shocks to FIs' balance sheets played a substantial role in lowering measured TFP.
ISSN:0305-9049
1468-0084
DOI:10.1111/obes.12517