News shocks and the Japanese macroeconomic fluctuations
Are the changes in the future technology process, the so-called “news shocks,” the main contributors to the macroeconomic fluctuations in Japan over the past forty years? In this paper, we take two structural vector-auto-regression (SVAR) approaches to answer this question. First, we quantitatively evaluate the relative importance of news shocks among candidate shocks, estimating a structural vectorerror-correction model (SVECM). Our estimated results suggest that the contribution of the TFP news shocks is nonnegligible, which is in line with the findings of previous works. Furthermore, we disentangle the source of news shocks by adopting several kinds of restrictions and find that news shocks on investment-specific technology (IST) also have an important effect. Second, to minimize the gap between the SVAR approach and the Bayesian estimation of a dynamic stochastic general equilibrium model, we adopt an alternative approach: SVAR with sign restrictions. The SVAR with sign restrictions reconfirms the results that the news shocks are important in explaining the Japanese macroeconomic fluctuations.
Are news shocks the main source of the Japanese macroeconomic fluctuations? Previous works have presented different results. Beaudry and Portier (2005) employ a SVECM with a combination of long-run and short-run restrictions to divide the TFP shocks into surprise and news components. The news shock in their econometric model is the shock that does not have an impact effect on the current TFP but increases the future TFP several quarters after. They find that the estimated TFP news shock is a dark horse behind the Japanese macroeconomic fluctuations, and that a negative news shock occurred in the beginning at the 1990s which might have been relevant with the so-called “lost decade.” Fujiwara, Hirose, and Shintani (2011) assess the importance of news shocks based on an estimation of a dynamic stochastic general equilibrium (DSGE) model using a Bayesian method. They introduced one-to-four-quarters-ahead TFP news shocks and find that the TFP news shocks are nonnegligible but minor in explaining the macroeconomic fluctuations in Japan.