The Great Moderation in the Japanese Economy
This paper investigates the contribution of technology and nontechnology shocks to the changing volatility of output and labor growth in the postwar Japanese economy. A time-varying vector autoregression (VAR) with drifting coefficients and stochastic volatilities is modeled and long-run restriction is used to identify technology shocks in line with Gal´ı (1999) and Gal´ı and Gambetti (2009). We find that technology shocks are responsible for significant changes in the output volatility throughout the total sample period while the volatility of labor input is largely attributed to nontechnology shocks. The driving force behind these results is the negative correlation between labor input and productivity, which holds significantly and persistently over the postwar period.
Most industrialized economies have experienced a substantial decline in output growth volatility in the postwar period, a phenomenon known as “the Great Moderation.” In the U.S. case, many authors have investigated the characteristics of and reasons for the Great Moderation that started in the mid-1980s. Possible explanations include good luck, better monetary policy, and changes in the economic structure, such as inventory management and labor market statistics. Based on the time-varying and Markov-switching structural VAR methods, the good luck hypothesis has been advocated by many authors, including Stock and Watson (2002, 2005), Primiceri (2005), Sims and Zha (2006), Arias, Hansen, and Ohanian (2006), and Gambetti, Pappa, and Canova (2006). On the other hand, the good policy hypothesis has been supported by many other authors including Clarida, Gal´ı, and Gertler (2000), Lubik and Schorfheide (2004), Boivin and Giannoni (2006), and Benati and Surico (2009). There are different approaches to considering structural changes, including Campbell and Hercowitz (2005) and Gal´ı and Gambetti (2009). In particular, Gal´ı and Gambetti (2009) capture the changing patterns of the correlations among the labor market variables.