Working Paper, Brown University, Department of Economics 2003-25
A notable feature of the Japanese economy in the last two decades is the large fluctuations in asset prices. We examine whether they can by accounted for by a stochastic growth model with habit persistence and costly capital adjustment. For the real estate price, people’s expectations on the trend growth rate in the future plays a crucial role. In particular, our model with adaptive expectations about future productivity growth can reproduce the aggregate land price. However, even with habit persistence and costly capital adjustment, a substantial portion of the stock price fluctuations is left unexplained, and a puzzle remains. Our result suggests that the price of installed capital is close to zero or that people don’t take into account the value of capital when trade shares.
Japanese economy land prices stock prices adaptive expectations productivity growth