Departmental Bulletin Paper Business cycle accounting for the Japanese economy using the parameterized expectations algorithm

INABA, Masaru

19pp.1 - 7 , 2017-03 , Faculty of Economics, Kansai University
We propose an application of the parameterized expectations algorithm (PEA) to business cycle accounting (BCA). The PEA has an advantage in that it is simple and easier to understand and implement than other non-linear solution methods for a dynamic stochastic general equilibrium model. Moreover, we apply BCA to the Japanese economy using the PEA, which relaxes the perfect foresight assumption and yields a result similar to the main finding of deterministic BCA by Kobayashi and Inaba (2006). The effects of the investment wedge are not a significant cause of the persistent recession during the 1990s. The output derived from the efficiency wedge roughly replicates actual output, while the discrepancy widened during the 1990s. The labor wedge had a significant depressing effect on output during 1989-2005. The efficiency wedge explains the recent economic recovery.

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