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Stabilized Business Cycles with Increased Output Volatility at High Frequencies

October 2007
Takeshi Kimura*1
Kyosuke Shiotani*2

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Abstract

In Japan, like many other industrialized countries, output volatility declined dramatically in the 1980s. In order to investigate the cause of this decline, we decompose the variance of output growth by frequency. Our important findings are: (1) The total variance of output growth decreased, which resulted from a reduction in the volatility at business-cycle frequencies; (2) At business-cycle frequencies, the variance of production fell by a larger percentage than did the variance of sales; and (3) In stark contrast, at high frequencies, the variance of production increased, while the variance of sales decreased. These features of production at different frequencies cannot be explained by changes in the sales process and cost-shock process. Instead, improved business practices----such as the adoption of the just-in-time technique----played a direct role in stabilizing the business cycles, while increasing output volatility at high frequencies.

JEL classification:
E22; E23; E32

Keywords:
Output volatility; Inventories; Business cycle

We are grateful for helpful discussions and comments from Kazuo Momma, Masahiro Higo, Takatoshi Sekine, Hiroshi Fujiki, Ichiro Fukunaga, as well as seminar participants at the Bank of Japan. The views expressed herein are those of the authors alone and do not necessarily reflect those of the Bank of Japan.

  • *1 Research and Statistics Dept., Bank of Japan
    E-mail: takeshi.kimura@boj.or.jp
  • *2 Research and Statistics Dept., Bank of Japan
    E-mail: kyousuke.shiotani@boj.or.jp

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