Business Cycle Accounting under Catching Up with the Joneses

eng

09111247

https://doi.org/10.15002/00008721

Journal of International Economic Studies

27

47

59

2013-03

Several studies assert that multiple factors are responsible for the recent behavior of the business cycle in Japan. For example, Kobayashi and Inaba (2006, Japan and the World Economy 18,418–440) apply the business cycle accounting method proposed by Chari et al. (2007, Econometrica 75,781–836) and conclude that the labor wedge played a significant role in the Japanese economy in the 1980s and 1990s. In this paper, we reconsider this finding using time-series filtering techniques and a "catching up with the Joneses" utility function. We find that the efficiency wedge explains almost all of the recent movements in output in Japan. In addition, because the effects of the labor and capital wedges cancel each other out, they do not appear to significantly affect the business cycle. These results suggest that when employing the business cycle accounting method, researchers should purposively select both the detrending procedure and the utility function that they use.

Article

AA10459262