August 2002
Ichiro Fukunaga

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ABSTRACT

How do financial factors due to credit-market imperfections affect economic fluctuations? This paper calibrates a dynamic general equilibrium model incorporating credit-market imperfections using Japanese data. The model exhibits financial accelerator effects, the mechanism whereby credit-market imperfections help to propagate or amplify initial shocks to the economy. Our main result is that the large volatility of Japan's corporate investment can be explained by taking account of this mechanism. We examine the robustness of the results and consider some variations of the model including the adoption of alternative monetary policy rules and the introduction of an asset price bubble.

Keywords: financial accelerator, dynamic general equilibrium model, monetary policy rule, asset price bubble, Japan's economy.

JEL Classification: E30, E44, E50