Investment Specific Technological Changes in Japan

Abstract

This paper studies the role of investment specific technological

changes in economic fluctuations in Japan. Following Greenwood,

Hercowitz, and Huffman (1998) and Fisher (2006), we model a

consumption goods producing sector and an investment goods

producing sector, and consider technological changes that are

common to the two sectors as well as one that is specific to the

latter sector. We evaluate each shock's role using two approaches.

In the first approach, we extend the model of Hayashi and Prescott

(2002) by incorporating investment specific technological changes.

This model is calibrated to the Japanese economy. In the second

approach, we estimate an SVAR model with sign restrictions (Uhlig

2005) in which the restrictions are derived from implications that

are common to competing major dynamic general equilibrium

models incorporating investment specific technology shocks. The

first exercise suggests that investment specific technological

improvements sustained the potential growth rate of the Japanese

economy in its lost decade. The second exercise shows that

investment specific technology shocks are at least as important as

neutral technology shocks in Japans business cycles.