A1061
Title: Underreaction at the ZLB: Macro and micro evidence from Japan
Authors: Hirokuni Iiboshi - Nihon University (Japan)
Yasuharu Iwata - Dokkyo University (Japan) [presenting]
Takayuki Tsuruga - The Universiity of Osaka (Japan)
Abstract: Standard NK models predict that positive supply shocks are less expansionary at the ZLB than in normal times. In contrast, fiscal policy shocks are predicted to be more expansionary when the ZLB binds. However, several recent studies documented empirical evidence that is inconsistent with these predictions. The purpose is to contribute to this strand of literature by providing macro and micro evidence from Japan. Estimating TVP-VAR models identified with a sign and zero restrictions, it is found that there is little time variation in output and price responses to supply shocks throughout the pre-and the ZLB periods. Output and price responses to fiscal shocks, on the other hand, are found to be smaller during the ZLB period. To examine the underlying mechanism, it is studied how firms' ex-post forecast errors respond to public signals on inflation and budget. It is found that inflation forecasts underreact to these public signals. The underreaction serves to make the real interest rate responses to supply and fiscal policy shocks smaller. Evidence is also found that growth forecasts underreact to a public signal on supplementary budgets at the ZLB while overreacting to it during the pre-ZLB period. This evidence from micro data corroborates with the macro evidence obtained using the TVP-VAR models.
