This paper attempts to reconcile the controversy regarding Japan's total factor productivity during its slump in the 1990s by clarifying the role of capital utilization. Hayashi and Prescott (2002) emphasized that the decline in the exogenous total factor productivity growth rate was the main cause. However, some empirical studies have also pointed out that the fall in capital utilization rates accounted for a large part of the decline in the total factor productivity growth rate. In this study we incorporate variable capital utilization into a neoclassical growth model, calculate total factor productivity taking into account capital utilization, and simulate the aggregate output and capital-output ratio. We found that although our total factor productivity growth rate in the 1990s is consistent with empirical studies, our simulation can explain the observed data. This result indicates the importance of capital utilization rates as a source of propagation during Japan's depression.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Political Science and International Relations