Equilibrium Indeterminacy and Asset Price Fluctuation in Japan: A Bayesian Investigation


  • I would like to thank Thomas Lubik for his guidance and support. I benefited from discussions with Kosuke Aoki, Ippei Fujiwara, and Andrew Levin at the outset of this research. I also thank Jon Faust, Tomiyuki Kitamura, Nobuhiro Kiyotaki, Teruyoshi Kobayashi, the editor Pok-sang Lam, Frank Schorfheide, Yi Wen, two anonymous referees, and participants at the 2006 North American Summer Meeting of the Econometric Society and the Modern Monetary Economics Summer Institute in Kobe for insightful comments and discussions. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Japan.


This paper investigates sources of asset price fluctuation in Japan using an estimated financial accelerator model. For explicit treatment of expectational beliefs characterized by sunspots, the model is analyzed over the parameter space where the equilibrium can be indeterminate. We show that indeterminacy arises if the financial accelerator effect is sufficiently large. According to our Bayesian estimation results, Japan's economy was affected by sunspot shocks; however, the contribution of the sunspots to asset price volatility was low. Rather, net worth and cost shocks drove the asset price fluctuation. We find, however, that the sunspots substantially affected capital investment.