Consumption, Land Prices and the Monetary Transmission Mechanism in Japan

71 Pages Posted: 19 May 2009

See all articles by John Muellbauer

John Muellbauer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Keiko Murata

Government of Japan - Cabinet Office

Date Written: April 2009

Abstract

This paper documents the role of consumption in explaining the weak interest rate effect of monetary transmission in Japan. Economic theory suggests circumstances in which a rise in short term real interest rates can increase consumption, contrary to much conventional wisdom. This paper suggests that these circumstances are more likely to be prevalent in Japan and finds strong empirical evidence for a positive effect. Life-cycle theory also suggests that housing wealth effects on aggregate consumption including imputed rent are small and negative. Positive effects of the kind found in the UK and the US are due to the role of the credit channel. In countries where consumer access to credit is restricted, these restrictions can enhance the negative effect on consumption of higher house prices because saving for a housing deposit needs to be higher. Our evidence of a negative land price effect for Japan supports this hypothesis. We find no evidence of significant household credit market liberalization from a model for household debt in Japan. We also find evidence for a sizable negative effect on consumption from higher government deficits, suggesting fiscal policy also had limitations. These findings contribute to explanations of Japan's 'lost decade'.

Keywords: interest rate effect on consumption, Japan's lost decade, Land prices and consumption, monetary transmission in Japan

JEL Classification: E21, E32, E44, E51

Suggested Citation

Muellbauer, John and Murata, Keiko, Consumption, Land Prices and the Monetary Transmission Mechanism in Japan (April 2009). CEPR Discussion Paper No. DP7269, Available at SSRN: https://ssrn.com/abstract=1405066

John Muellbauer (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Keiko Murata

Government of Japan - Cabinet Office

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Chiyoda-ku, Tokyo 1008670
Japan

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