The boom and the bust of the Japanese economy : A quantitative look at the period 1980 – 2000 §

In this paper we quantitatively investigate the boom and the bust of the Japanese economy during 1980–2000 using the business cycle accounting technique. This method helps us identify the distortion margins called ''wedges'' that played a significant role in accounting for the output fluctuations. Applying our model to Japan, we find that efficiency and investment wedges can almost wholly account for output increases of the 1980s. Labor wedges by themselves would have caused a recession beginning in late 1980s but was overwhelmed by the positive impact of efficiency and investment wedges. In the 1990s, efficiency, labor and investment wedges all contributed to the recession. We next extend the literature by conducting robustness tests to investigate the sensitivity of BCA results to small modifications in methodology.