A comparative estimation of financial frictions in Japan and Korea

Abstract

We apply the Business Cycle Accounting method a la Chari,

Kehoe, and McGrattan (2007) to the Japanese and the Korean

economy and quantitatively analyze the effects of financial frictions

during the recent recessions. First, we compute exogenous distortions

in the financial, government purchases, labor, and production

markets. The preliminary results show that the sudden drop in

production efficiency (TFP) was the main reason of the Korean

recession while the increase in labor market distortions was the

main reason of the Japanese slump. Next, we orthogonalize the

innovations to the distortions and quantify the maximum spill-over

effects of financial frictions on output fluctuations in both countries

following Christiano and Davis (2006). Our results imply that

financial frictions may have been important in explaining the

recessions in both countries through their effects on TFP and

labor market distortions.