Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan

Posted: 25 May 2017 Last revised: 31 Oct 2017

See all articles by Jonathan Lecznar

Jonathan Lecznar

Boston University

Thomas A. Lubik

Johns Hopkins University - Department of Economics

Date Written: 2017-05-18

Abstract

We study the dynamics of consumption, the real interest rate, and measures of labor input in Japan over the period from 1985-2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the Generalized Methods of Moments shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions. Specifically, following the tax hike and during the low nominal rate period, Japanese households became less risk averse and exhibited a higher degree of habit formation.

Keywords: Euler equation, GMM, nominal interest rate, labor supply

JEL Classification: C26, E21, E43

Suggested Citation

Lecznar, Jonathan and Lubik, Thomas A., Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan (2017-05-18). FRB Richmond Working Paper No. 17-8. Available at SSRN: https://ssrn.com/abstract=2973106

Jonathan Lecznar (Contact Author)

Boston University

595 Commonwealth Avenue
Boston, MA 02215
United States

Thomas A. Lubik

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
173
PlumX Metrics