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Did the Financial Crisis in Japan Affect Household Welfare Seriously?


  • The authors would like to thank the Institute for Research on Household Economics for providing their panel data and Professor Takeshi Amemiya for encouraging them to initiate this project. They would also like to thank the editor and an anonymous referee of the journal, Naohito Abe, Tony Cavoli, Dean Corbae, Ippei Fujiwara, Mototsugu Fukushige, Yoshio Higuchi, Charles Yuji Horioka, Takeo Hoshi, Hidehiko Ichimura, Yasushi Iwamoto, Hiroyuki Kasahara, Ryo Kambayashi, Young Sik Kim, Miki Kohara, Takashi Kurosaki, John Litwack, Colin McKenzie, Chiaki Moriguchi, Makoto Saito, Masaya Sakuragawa, Michio Suzuki, Tomoya Suzuki, and Wako Watanabe for their helpful comments and Shunichiro Bessho for his excellent research assistance.


We investigate whether and how the credit crunch during the financial crisis in Japan affected household welfare. We estimate the consumption Euler equation with endogenous credit constraints using household panel data for 1993–99, generating several findings. First, a small but nonnegligible portion of the households faced credit constraints during the crisis, rejecting the standard consumption Euler equation. Second, the credit crunch affected household welfare negatively, albeit not seriously. The estimated welfare loss ranges between 2% to 10% increases in marginal utility, depending on income level. Finally, our results corroborate that the credit crunch in Japan was supply-driven.

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