An Exploration of the Japanese Slowdown during the 1990s

Why was the 1990s a lost decade for Japan? How is it possible that the Japanese economy stagnated for a decade if none of the shocks that arguably hit the economy seemed to have persisted for much more than three years or so? In this paper I show that the endogenous development and adoption of technologies can propagate these shocks making their e¤ect much more persistent. When feeding the markup shocks observed in Japan during the early 1990s, the model is able to generate time series for output, TFP, employment, consumption and investment that track closely the actual data. In particular, the productivity slowdown in the model is as protracted as in the data. Reassuringly, I also …nd evidence that, as predicted by the model, the speed of technology di¤usion slowed down in Japan during the 1990s and R&D expenditures also stopped growing.