Investment Specific Technological Changes in Japan

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 Japan's business cycles.