A Comparison of Japanese and U. S. Macroeconomic Behavior by a Var Model

Abstract

This paper focuses on macroeconomic behavior of the U.S. and Japan with a special attention to characteristics of Japanese financial markets and the pattern of Japan's trade with the rest of the world. Explanations of observed facts summarized by vector autoregressions (VAR) are given referring to the arrangement of Japanese financial institutions and the economic structure with respect to foreign trade. First, interest rates do not have any explanatory power on production in Japan, unlike in the U.S. This is explained by strong interventions in financial markets by the Bank of Japan. Second, stock prices in both Japan and the U.S. are exogenous. Third, bank loans in Japan plays a similar role to that of money. Last, contrary to our intuition, shocks from abroad in terms of import prices do not have a strong impact of domestic prices and production. This paper, which includes Japan, fills the lacuna in Sims' comparative study in macroeconomic behaviors of the U.S. and the European countries.