Accounting for the Business Cycle Relationship Between Japan and Asia

Transcription

1 Accounting for the Business Cycle Relationship Between Japan and Asia Hideaki Hirata and Keisuke Otsu ESRI International Conference 2010 June Hirata and Otsu (ESRI) East Asia BCA 6/24 1 / 31

2 Introduction Facts Korea and Taiwan grew much faster than Japan over the period average annual growth rates: 4.4%, 3.9%, 1.5% Business cycles in Japan and Asia (Korea + Taiwan) are highly correlated in the 1990s and 2000s output correlation: -28% (1980s), 53% (1990s), 71% (2000s) Japan and Asia (Korea + Taiwan) are important trade partners Hirata and Otsu (ESRI) East Asia BCA 6/24 2 / 31

3 Figure 1a. Output-Detrended by 0.5% Growth Trend Deviation from 0.5% Growth Trend JAPAN KOREA TAIWAN ASIA

4 0.06 Figure 1b. Output-HP Filtered Deviation from HP Trend JAPAN KOREA TAIWAN ASIA

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6 Introduction Summary Key Questions what are the major sources of growth and business cycles in Japan and Asia how did Asia and Japan a ect each other over the period? Hirata and Otsu (ESRI) East Asia BCA 6/24 3 / 31

7 Introduction Literature 1 Business cycle correlation between Asia and Japan comovement: Chen and Shen (2007) etc. trade integration: Kim, Lee and Park (2009) nancial integration: Fujiki and Hagiwara (2007) Hirata and Otsu (ESRI) East Asia BCA 6/24 4 / 31

8 Introduction Literature 2 International business cycle models Baxter and Crucini (1995): two-country one-good Stockman and Tesar (1995): two-country two- nal-good Backus, Kehoe and Kydland (1994): two-country two-intermediate-good Hirata and Otsu (ESRI) East Asia BCA 6/24 5 / 31

9 Introduction Literature 3 Business cycle accounting: Chari, Kehoe and McGrattan (2007) de ne competitive equilibrium in a DSGE model compute exogenous "wedges" as distortions in equilibrium conditions using data simulate the model taking the computed wedges as exogenous Hirata and Otsu (ESRI) East Asia BCA 6/24 6 / 31

10 Introduction Summary Contribution of this paper Apply the business cycle accounting method to a two-country business cycle model a la Backus, Kehoe and Kydland (1994) Analyze the sources of business cycle relationships between Japan and Asian Tigers in a DSGE model Hirata and Otsu (ESRI) East Asia BCA 6/24 7 / 31

11 Introduction Wedges Business cycle accounting (closed economy) government wedges: g = y c x tb labor wedges: 1 τ l = MRS(c, l)/mpl capital wedges: 1 τ k = MRS(c, c 0 )/Rx e ciency wedges: z = f /k θ l 1 θ International business cycle accounting international price wedges: exp(p) = MUc JP /P JP MUc AS /P AS trade wedges: τ = tb JP + tb AS /rer Hirata and Otsu (ESRI) East Asia BCA 6/24 8 / 31

12 Introduction Results Long-run Asian e ciency wedges had a positive long run e ect on output in both countries Japanese e ciency wedges have negative long run e ect on output in both countries Short-run Asian e ciency wedges are important in accounting for the short run Asian output uctuation Japanese e ciency wedges are important in accounting for the short run Japanese output uctuation Asian e ciency wedges led to a drop in Japanese output during the Asian crisis Hirata and Otsu (ESRI) East Asia BCA 6/24 9 / 31

13 Introduction Outline Introduction Model Quantitative Analysis Conclusion Hirata and Otsu (ESRI) East Asia BCA 6/24 10 / 31

14 Model Intermediate Goods Firm Intermediate goods rms combine labor and capital and produce specialized intermediate goods in each country i = JP, AS f i t (s t ) = z i t (s t )(k i t (s t )) θi (l i t (s t )) 1 θi where f JP t (s t ) = at JP (s t ) + at AS (s t ) t (s t ) = bt JP (s t ) + bt AS (s t ) f AS Intermediate goods pro ts π i t(s t ) = p i j,t(s t )f i t (s t ) w i t (s t )l i t (s t ) r i t (s t )k i t (s t ) where j = a for JP and j = b for AS Hirata and Otsu (ESRI) East Asia BCA 6/24 11 / 31

15 Model Final Goods Firm Final goods rms combine intermediate goods and produce nal goods G JP t G AS t (at JP (s t ), bt JP (s t )) = (at AS (s t ), bt AS (s t )) = Final goods pro ts η(at JP (s t )) ε ε 1 + (1 η)(bt JP (s t )) ε ε 1 (1 η)(at AS (s t )) ε ε 1 + η(bt AS (s t )) ε ε 1 bπ i t(s t ) = G i t (a i t(s t ), b i t(s t )) p i a,t(s t )a i t(s t ) p i b,t(s t )b i t(s t ) ε ε 1 ε ε 1 Hirata and Otsu (ESRI) East Asia BCA 6/24 12 / 31

16 Model Household Preferences U = β t π(s t ) Ψ i ln ct i (s t ) + (1 Ψ i ) ln(1 lt i (s t )) t=0 s t s t : state of the economy π(s t ): probability of the state to occur Hirata and Otsu (ESRI) East Asia BCA 6/24 13 / 31

17 Model Household Budget constraint: (1 τ i lt(s t ))w i t (s t )l i t (s t ) + (1 τ i kt(s t ))r i t (s t )k i t (s t 1 ) +rert i (s t )dt i (s t ) + trt i (s t ) = ct i (s t ) + xt i (s t ) + rert i (s t ) q t (s t+1 js t )dt+1(s i t+1 js t ), st t+1 js t dt i : state contingent real international claim denominated in yen q t : price of state contingent claim (for each possible state) rert i : real exchange rate (rer JP t = 1, rert AS = rer t ) τ i lt, τi kt : distortionary labor and capital income tax trt i : lump sum transfer Hirata and Otsu (ESRI) East Asia BCA 6/24 14 / 31

18 Model Household Capital law of motion Γ i k i t+1(s t ) = x i t (s t ) + (1 δ i )k i t (s t 1 ) + Φ where Γ i : growth trend of technology and population Capital adjustment cost x i t (s t ) kt i (s t 1 kt i (s t 1 ) ) x i Φ t (s t ) kt i = φi (s t 1 ) 2 x i t (s t ) k i t (s t 1 ) Ω i 2 where Ω i = Γ i (1 δ i ) Hirata and Otsu (ESRI) East Asia BCA 6/24 15 / 31

19 Model Government Government budget constraint τ i lt(s t )w i t (s t )l i t (s t ) + τ i kt(s t )r i t (s t )k i t (s t ) = tr i t (s t ) + g i t (s t ) Hirata and Otsu (ESRI) East Asia BCA 6/24 16 / 31

20 Model International Financial Market International nancial market equilibrium where [q t (s t+1 js t )dt+1(s JP t+1 js t ) d JP +[q t (s t+1 js t )dt+1(s AS t+1 js t ) (s t ) + tbt AS (s t )/rer t (s t ) = τ t (s t ) = tb JP t t (s t )] dt AS (s t )] tbt JP (s t ) = pat JP at AS (s t ) pbt JP t (s t ) + τ t (s t ) tbt AS (s t ) = pbt AS t (s t ) pat AS at AS (s t ). p t causes disturbances in the conversion rate of resources in one country shifted to another τ t causes disturbances in the total resource in the world Hirata and Otsu (ESRI) East Asia BCA 6/24 17 / 31

21 Model International Relative Prices Terms of trade tot t = pjp a,t p JP b,t = pas a,t p AS b,t The real exchange rate: the price of Japanese nal goods relative to that of Asian nal goods rer t = MUJP c,t MU AS c,t = exp(p t ) pas a,t p JP a,t = exp(p t ) pas b,t p JP b,t Hirata and Otsu (ESRI) East Asia BCA 6/24 18 / 31

22 Model Domestic Absorption and National Accounts Domestic absorption Gross domestic product G i t (a i t(s t ), b i t(s t )) = c i t (s t ) + x i t (s t ) + g i t (s t ) y i t = p i jtf i t = c i t (s t ) + x i t (s t ) + g i t (s t ) + tb i t(s t ) where total factor productivity is p i jt zi t Hirata and Otsu (ESRI) East Asia BCA 6/24 19 / 31

23 Model International Prices Terms of trade tot t = pjp a,t p JP b,t = pas a,t p AS b,t The real exchange rate: the price of Japanese nal goods relative to that of Asian nal goods rer t = exp(p t ) pas a,t p JP a,t = exp(p t ) pas b,t p JP b,t Hirata and Otsu (ESRI) East Asia BCA 6/24 20 / 31

24 Model Wedges 10 exogenous variables s = fg i, τ i l, τi x, z i, p, τg s t = P 0 + P s t 1 + ε t where ε = fε i g, ε i l, εi x, ε i z, ε p, ε ts g N(0, V ) Hirata and Otsu (ESRI) East Asia BCA 6/24 21 / 31

25 Model Equilibrium Capital Euler equation Γ i (1 + Φ 0 t)muc i t = β i E t "MUc i t+1 (1 τ i!# kt+1 )pi j,t+1 MPki t+1 +(1 + Φt ) δ i Φt+1 0 x t+1 k t+1 + Φ t+1 Labor First order condition MUlt i MUct i = (1 τ i lt)p i j,tmpl i t International nancial condition (complete markets) rer t = MUcJP t MUct AS = exp(p t ) pas a,t p JP a,t Hirata and Otsu (ESRI) East Asia BCA 6/24 22 / 31

26 Model Equilibrium Domestic resource constraint Production function y i t = c i t + x i t + g i t + tb i t f i t = exp(z i t )(k i t ) θi (l i t ) 1 θi Capital law of motion Γ i k i t+1 = x i t + (1 x δ i )kt i i + Φ t kt i kt i International resource constraint tb JP t + tbt AS /rer t = τ t Hirata and Otsu (ESRI) East Asia BCA 6/24 23 / 31

27 Model Equilibrium Domestic absorption G i t (a i t, b i t) = c i t + x i t + g i t International prices MUct JP MUct AS Ga,t JP Gb,t JP = exp(p t ) G a,t AS Ga,t JP = G a,t AS Gb,t AS = tot t Hirata and Otsu (ESRI) East Asia BCA 6/24 24 / 31

28 Quantitative Analysis Parameters Calibration Table 2. Parameter Values Japan Korea Taiwan Common θ δ Γ β Ψ Hirata and Otsu (ESRI) East Asia BCA 6/24 25 / 31

29 Quantitative Analysis Parameters Stochastic process s t = P 0 + P s t 1 + ε t where P = 0.8 I 1010 also estimated by maximum likelihood estimation simulation results are not sensitive to the stochastic process parameters Hirata and Otsu (ESRI) East Asia BCA 6/24 26 / 31

30 Quantitative Analysis Wedges 1 solve the model for linear decision rules fk i t+1, y i t, c i t, l i t, x i t, g i t g = DR(k i t, g i t, τ i lt, τi kt, zi t, p t, τ t ) 2 assuming k i 1 = ki ss, compute fg i 1, τi l1, τi k1, zi 1, p 1, τ 1 g from 3 compute k i 1 from fy i 1, c i 1, l i 1, x i 1, g i 1g = DR(k i 1, g i 1, τ i l1, τi k1, zi 1, p 1, τ 1 ) k i 2 = DR(k i 1, g i 1, τ i l1, τi k1, zi 1, ν 1, τ 1 ) 4 solve for fg i 2, τi l2, τi k2, zi 2, p 2, τ 2 g from fy i 1, c i 1, l i 1, x i 1, g i 1g = DR(k i 1, g i 1, τ i l1, τi k1, zi 1, p 1, τ 1 ) 5 repeat 4 and 5 for the whole period Hirata and Otsu (ESRI) East Asia BCA 6/24 27 / 31

31 1.5 Figure 3. Wedges g(jp) tl(jp) tk(jp) z(jp) g(as) tl(as) tk(as) z(as) p t

32 Quantitative Analysis Simulation Simulation with each wedge (linearly detrended) growth in Asian e ciency bene tted both Asia (112%) and Japan (62%) substantially drop in Japanese e ciency hurt Asia (-35%) and Japan (-66%) other wedges do not seem important Hirata and Otsu (ESRI) East Asia BCA 6/24 28 / 31

33 0.8 Figure 4a. Results-Japanese Output g(jp) tl(jp) tk(jp) z(jp) g(as) tl(as) tk(as) z(as) p t DATA

34 1.4 Figure 4b. Results-Asian Output g(jp) tl(jp) tk(jp) z(jp) g(as) tl(as) tk(as) z(as) p t DATA

35 Quantitative Analysis Propagation Mechanism The e ect of a rise in e ciency wedges a rise in z AS leads to an improvement in the Japanese terms of trade this works as a positive total factor productivity shock to Japanese aggregate output both Asia and Japan booms Hirata and Otsu (ESRI) East Asia BCA 6/24 29 / 31

36 1.2 Impulse Response to Efficiency Wedge Efficiency (AS) Output (JP) Output (AS) Terms of Trade

37 Quantitative Analysis Simulation Simulation with each wedge (HP ltered) e ciency wedges are important in accounting for uctuation in output in each region the drop in e ciency wedge in Asia in 1997 caused a large drop in output in Japan! (-2.6%) the main reason of the recent recession is the drop in e ciency wedges in each country Hirata and Otsu (ESRI) East Asia BCA 6/24 30 / 31

38 0.06 Figure 5a. Results-Japanese Output (HP Filtered) g(jp) tl(jp) tk(jp) z(jp) g(as) tl(as) tk(as) z(as) p t DATA

39 0.06 Figrue 5b. Results-Asian Output (HP Filtered) g(jp) tl(jp) tk(jp) z(jp) g(as) tl(as) tk(as) z(as) p t DATA

40 Conclusion E ciency wedges are important in accounting for both short run uctuations and long run trends in each country the contributions of other wedges were relatively small Extensions what are e ciency wedges? long run trend in e ciency wedges: productivity short run uctuation in e ciency wedges: nancial frictions & e ciency? the e ects of US and China? Hirata and Otsu (ESRI) East Asia BCA 6/24 31 / 31