Japan Project Meets
Economic Fluctuations and Growth Research Meeting

Japan Project Meets

The NBER together with the Center on the Japanese Economy and Business, The Center for Advanced Research in Finance, the European Institute of Japanese Studies, and the Australia-Japan Research Centre held a project meeting on the Japanese economy in Tokyo on June 24 and 25. The organizers of the meeting were: Magnus Blomstrom, NBER and Stockholm School of Economics; Jennifer Corbett, Australia-Japan Research Centre; Fumio Hayashi, NBER and the University of Tokyo; Charles Horioka, NBER and Osaka University; Anil K Kashyap, NBER and the Graduate School of Business, University of Chicago; and David Weinstein, NBER and Columbia University. The following papers were discussed:

Joe Chen, Yun Jeong Choi, and Yasuyuki Sawada, University of Tokyo, "Suicide and Life Insurance"
Discussant: Emily Oster, University of Chicago and NBER

Jose A. Lopez and Mark M. Spiegel, Federal Reserve Bank of San Francisco, "Foreign Entry into Underwriting Services: Evidence from Japan's 'Big Bang' Deregulation"
Discussant: Takeo Hoshi, University of California, San Diego and NBER

Kimie Harada, Chuo University, and Takatoshi Ito, University of Tokyo and NBER, "Did Mergers Help Japanese Mega-Banks Avoid Failures? Analysis of the Distance to Default of Banks"
Discussant: Joe Peek, University of Kentucky

Kazuki Onji, Australian National University, and David Vera, Kent State University, "Tax Law Asymmetries and Income Shifting: Evidence from Japanese Capital Keiretsu"
Discussant: Yishay Yafeh, Hebrew University

Shiro Armstrong, Australian National University, "Interaction Between Trade, Conflict and Cooperation: The Case of Japan and China"
Discussant: Matthew Slaughter, Dartmouth College and NBER

Migiwa Tanaka, Bank of Japan, "Deflation in Durable Goods Markets: An Empirical Model of the Tokyo Condominium Market"
Discussant: Christopher Mayer, Columbia University and NBER

David Weinstein, and Christian Broda, University of Chicago and NBER, "Exporting Deflation? Chinese Exports and Japanese Prices"(NBER Working Paper No. 13942)
Discussant: Shujiro Urata, Waseda University

Kiu-Sik Bae and Dong-Bae Kim, Korea Labor Institute; Hiroyuki Chuma and Isao Ohashi, Hitotsubashi University; and Takao Kato, Colgate University, "High Performance Work Practices and Employee Voice: A Comparison of Japanese and Korean Workers"
Discussant: Jesse Shapiro, University of Chicago and NBER

Chen and his co-authors investigate the nexus between life insurance and suicide behavior using OECD cross-country data from 1980 to 2002. They find that for the majority of observations, there is a positive relationship between the suicide rate and life insurance density (that is, the premium per capita). Because life insurance policies pay death benefits even in suicide cases after the suicide-exemption period, the presence of adverse selection and moral hazard suggests an incentive effect that leads to this positive relationship. The novelty of this analysis lies in the use of cross-country variations in the length of the suicide-exemption period in life insurance policies as the identifying instrument for life insurance density. These results provide compelling evidence suggesting the existence of adverse selection and moral hazards in life insurance markets in OECD countries.

Lopez and Spiegel examine the impact of foreign underwriting activity using issue-level data in the Japanese "Samurai" and euro-yen markets over the period from 1992 to 2001. They find that the firms in these markets who chose Japanese underwriters over their foreign counterparts tended to be Japanese, riskier, smaller, seasoned, and collateralized. What determines underwriting fees? While the data in this study confirm that Japanese underwriters charged higher fees and spreads on average, the authors find that after conditioning for issuer characteristics, the residual charges of Japanese underwriters were actually lower than those of their foreign competitors. However, after accounting for the endogeneity of issuer choice, they find that firms tended to choose the proper nationality of underwriter - in the sense that switching from a Japanese underwriter to a foreign one, or vice versa, would be predicted on average to result in an increase in underwriting fees. Finally, the researchers examine t impact of the 1996 liberalization of foreign access to the "Samurai" bond market. They conduct a matching exercise, using yen-denominated issues in the euro-yen market as a control sample and find that deregulation led to a statistically and economically significant decrease in underwriting fees in the Samurai bond market.

In the 1990s, several large Japanese banks failed for the first time in Japan's postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge, presumably to make their operations more efficient and to avoid failures. Harada and Ito define, measure, and analyze the distance to default (DD) - a concept in corporate finance - of Japanese large banks, in order to establish whether mergers in the late 1990s and 2000s made the merged banks financially more robust. The novelty of this paper is its development of a method of estimating the DD for banks that experience a merger, and applying the method to the Japanese banking data. The researchers find: 1) financial soundness of a merged bank depended heavily on that of the pre-merged banks. Merger did not seem to add a special value to financial health. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and 2) not only did merger itself not improve the DD of the pre-merged banks, but a merged bank often experienced negative DD right after the merger. These findings are consistent with the view that merger was not intended to enhance bank operations, but rather to take advantage of the perceived too-big-to-fail policy. Another interpretation is that mergers with intended to enhance efficiency resulted in failed implementation of true operational efficiency - quick integration of computer operation systems and duplicating branch networks.

The asymmetric treatment of positive and negative income can create a tax incentive to engage in within-jurisdiction income shifting under a corporate income tax (CIT) that does not allow for the consolidation of group income. Onji and Vera aim to provide a justification for a group tax system by offering systematic evidence on the effects of taxes on within-group transfers. In the context of the Japanese CIT of the early 1990s, they develop a model of a corporate group that predicts different optimal shifting schedules for subsidiaries with paid-in capital above and below 100 million yen, because of the progressivity in the CIT. Using company-level data on 33,340 subsidiary-time pairs from 1988, 1990, and 1992, they find evidence consistent with their prediction. This finding underscores the importance of accounting for group behavior in the design of CIT.

Armstrong analyzes the complex interaction between trade and politics using Granger causality tests. The purpose here is to determine the presence and direction, both positive and negative, of causation between trade and political events and to gauge an idea of the lag length of causality. The study focuses on the Japan-China relationship where trade is growing quickly despite long standing political distance between the two countries. Arnstrong also examines the other important political and economic partner for both countries, the United States, by way of comparison. There is evidence of Granger causality with the presence of lag lengths, and the direction of causality being different for each bilateral relationship. The economic relationship underpins and constrains the political relationship between Japan and China, while an increase in positive political news and a decrease in negative political news promote trade to some degree.

Throughout the 1990s, the supply of new condominiums in Tokyo significantly increased while prices persistently fell. Tanaka investigates whether the market power of condominium developers is a factor in explaining the outcome in this market and whether there is a relationship between production-cost trend and the degree of market power that the developers were able to exercise. To answer these questions, Tanaka constructs and structurally estimates a dynamic, durable goods oligopoly model of the condominium market that incorporates time-variant costs and a secondary market. The estimates and counterfactual experiments using the estimated model yield the following results: first, there is no evidence that firms in the primary market have substantial market power in this industry; second, the counterfactual experiment shows that inflationary and deflationary expectations about production-cost trends have asymmetric effects on the market power of condominium producers: the increase in their markup when cost inflation is anticipated is significantly higher than the decrease in the markup when the same magnitude of cost deflation is anticipated.

Between 1992 and 2002, the Japanese Import Price Index (IPI) registered a decline of almost 9 percent and Japan entered a period of deflation. Weinstein and Broda show that much of the correlation between import prices and domestic prices was attributable to formula biases. Had the IPI been computed using a pure Laspeyres index, like the CPI, it hardly would have moved at all. A Laspeyres version of the IPI would have risen 1 percentage point per year faster than the official index. Second, they show that Chinese prices did not behave differently from the prices of other importers. Although Chinese prices are substantially lower than the prices of other exporters, they do not exhibit a differential trend. However, the authors estimate that the typical price per unit quality of a Chinese exporter fell by half between 1992 and 2005. Thus the explosive growth in Chinese exports is attributable to growth in the quality of Chinese exports and the increase in new products being exported by China.

Using a unique new cross-national survey of Japanese and Korean workers, Bae and his co-authors report the first systematic evidence on the effects on employee voice of High Performance Work Practices (HPWPs). They find for both nations that: 1) workers in firms with HPWPs aimed at creating opportunities for employees to get involved (such as shop floor committees and small group activities) are indeed more likely to have stronger senses of influence and voice on key shop floor decisionmaking than other workers; 2) workers whose pay is tied to firm performance are more likely to have a stake in firm performance and hence demand such influence and voice; and consequently 3) workers in firms with HPWPs are more likely to make frequent suggestions for productivity increases and quality improvement. Therefore, this paper contributes to a small yet growing new empirical literature that attempts to understand the actual process and mechanism through which HPWPs lead to better enterprise performance.

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Economic Fluctuations and Growth Research Meeting

The NBER's Program on Economic Fluctuations and Growth held its annual summer research meeting in Cambridge on July 12. Andrew B. Abel, Wharton School and NBER, and Ivan Werning, MIT and NBER, organized the meeting. These papers were discussed:

Andrew Atkeson, University of California, Los Angeles and NBER; V.V. Chari, University of Minnesota and NBER; and Patrick J. Kehoe, Federal Reserve Bank of Minneapolis and NBER, "Sophisticated Monetary Policies"
Critic: Marco Bassetto, Federal Reserve Bank of Chicago and NBER

George-Marios Angeletos, MIT and NBER, and Alessandro Pavan, Northwestern University, "Policy with Dispersed Information on Aggregate Shocks"
Critic: Harold Cole, University of Pennsylvania and NBER

Francisco J. Buera and Giorgio E. Primiceri, Northwestern University and NBER; and Alexander Monge-Naranjo, Northwestern University, "Learning the Wealth of Nations"
Critic: Daron Acemoglu, MIT and NBER

Valerie A. Ramey, University of California, San Diego and NBER, "Identifying Government Spending Shocks: It's All in the Timing"
Critic: Jordi Gali, CREI and NBER

Mark Aguiar, University of Rochester and NBER, and Erik Hurst, University of Chicago and NBER, "Deconstructing Lifecycle Expenditure"
Critic: Fatih Guvenen, University of Minnesota and NBER

Robert E. Hall, Stanford University and NBER, "Sources and Mechanisms of Cyclical Fluctuations in the Labor Market"
Critic: Robert Shimer, University of Chicago and NBER

The Ramsey approach to policy analysis finds the best competitive equilibrium given available instruments but is silent about how to get there uniquely. Many ways of specifying monetary policy lead to indeterminacy. Sophisticated policies do not. They depend on the history of past actions and exogenous events, they differ on and off the equilibrium path, and they can uniquely produce any desired competitive equilibrium. This result holds in two standard monetary economies and is robust to trembles and imperfect monitoring. The result implies that adherence to the Taylor principle is unnecessary. Atkeson, Chari, and Kehoe also show that such adherence is inefficient.

Information regarding commonly-relevant fundamentals (such as aggregate productivity and demand conditions) is widely dispersed in society, is only imperfectly aggregated through prices or other indicators of aggregate activity, and cannot be centralized by the government or any other institution. Angeletos and Pavan seek to identify policies that can improve the decentralized use of such dispersed information without requiring the government to observe it. They show that this can be achieved by appropriately designing the contingency of taxation on ex post public information regarding the realized fundamentals and aggregate activity. When information is common (as in the Ramsey literature), or when agents have private information regarding only idiosyncratic shocks (as in the Mirrlees literature), the contingency on fundamentals alone suffices for efficiency. When agents instead have private information regarding aggregate shocks, the contingency on aggregate activity becomes crucial. An appropriate combination of the two contingencies then permits the government to achieve the following goals: 1) dampen the impact of noise on equilibrium activity, and hence reduce non-fundamental volatility, without also dampening the impact of fundamentals; 2) improve the aggregation of information through prices and macro data; 3) restore a certain form of constrained efficiency in the decentralized use of information; and 4) guarantee that welfare increases with the provision of any additional information.

Buera and his co-authors study the evolution of market-oriented policies over time and across countries. They consider a model in which own and neighbors' past experiences influence policy choices through their effect on policymakers' beliefs. They estimate the model using a large panel of countries. They find that there is a strong geographical component to learning, which is crucial to explaining the slow adoption of liberal policies during the post-war period. This model also predicts that there would be a substantial reversal to state intervention if the world now was hit by a shock of the size of the Great Depression.

Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, where as the Ramey-Shapiro narrative identification approach finds a fall. Ramey shows that a key difference in the approaches is the timing. Both professional forecasts and the narrative-approach shocks will Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Finally, Ramey introduces a new variable that is based on narrative evidence and is much richer than the Ramey-Shapiro simple military dates. Shocks to this variable also lead to declines in consumption and real wages.

Aguiar and Hurst revisit two well-known facts regarding life cycle expenditures: the familiar "hump" shaped life cycle profile of nondurable expenditures; and that cross-household consumption inequality increases steadily throughout the life cycle. The authors show that the behavior of total nondurables masks surprising heterogeneity in the life cycle profile of individual sub-components. They find that three categories account for nearly the entire decline in mean expenditure post-middle age: food, transportation, and clothing/personal care. All other nondurable categories studied - including housing services, utilities, entertainment, domestic services, charitable giving, gambling, and so on - show no decline over the life cycle. Similarly, nearly all of the increase in cross-sectional inequality is driven by these same three categories. Excluding food, clothing, and transportation from the measure of nondurable expenditures reduces the increase in consumption inequality by a factor of 8, and removes nearly all of the increase post-middle age. The authors show that the categories driving life cycle consumption are either inputs into market work (clothing and transportation) or are amenable to home production (food). Changes in the opportunity cost of time will cause movements in expenditure on such goods even if there is no change to life time resources. The patterns documented in this paper suggest that prior inferences from consumption data regarding the extent of uninsurable risk faced by households are sensitive to the inclusion of work related expenses and the home production of food. The disaggregated consumption data also pose a challenge to models that emphasize intertemporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment, to explain the life cycle profile of expenditures.

Hall develops a model that accounts for the cyclical movements of hours and employment in the United States over the past 60 years. The model pays close attention to evidence about preferences for work and consumption. About a third of cyclical variations in total hours of work per person are in hours per worker and the remainder in the employment rate, workers per person. Hall shows that reasonable volatility in the driving force and a reasonable elasticity of labor supply provide a believable account of the observed cyclical movements in hours per worker. He defines and estimates an employment-rate function, analogous to the supply function for hours per worker. His work differs from previous attempts to place cyclical movements of total hours on a labor supply curve by its explicit treatment of unemployment in a framework parallel to the supply of hours of work by the employed.

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