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Do Investment-Specific Technological Changes Matter for Business Fluctuations? Evidence from Japan

March 2010
Yasuo Hirose *1
Takushi Kurozumi *2


The observed decline in the relative price of investment goods in Japan suggests the existence of investment-specific technological (IST) changes. This paper examines whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model with Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We then find that the estimated investment adjustment cost shocks correlate strongly with the diffusion index of firms' financial position in the Tankan (Short-term Economic Survey of Enterprises in Japan). We thus argue that the large decline in investment growth in the early 1990s is due to an increase in investment adjustment costs stemming from firms' tight financial constraint after the collapse of Japan's asset price bubble.

Business fluctuation; Investment-specific technology; Investment adjustment cost shock; Financial intermediation cost; Firms' financial constraint

JEL classification
E22; E31; E32

The authors are grateful for discussions and comments from Marco Del Negro, Hiroshi Fujiki, Ippei Fujiwara, Shin-ichi Fukuda, Ichiro Fukunaga, Hibiki Ichiue, Sohei Kaihatsu, Tomiyuki Kitamura, Toshihiko Mukoyama, Toshitaka Sekine, Etsuro Shioji, Nao Sudo, Tomohiro Sugo, Ken Taniguchi, Yuki Teranishi, and Kozo Ueda, as well as seminar participants at the Bank of Japan. Any remaining errors are the sole responsibility of the authors. The views expressed herein are those of the authors and should not be interpreted as those of the Bank of Japan.

  • *1   Monetary Affairs Department, Bank of Japan.
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  • *2   Monetary Affairs Department, Bank of Japan.
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