Accounting for Japanese Business Cycles: A Quest for Labor Wedges

The Japanese business cycle from 1980 to 2007 portrays a less contemporaneous correlation of labor with output than in the United States, and in addition labor tends to lead output by one quarter. A canonical real business cycle model cannot account for these facts. This paper uses the business cycle accounting method following Chari, Kehoe, and McGrattan (2007) and shows that ef?ciency and labor market distortions are important in accounting for the quarterly business cycle ?uctuation patterns in Japan. Fiscal and monetary variables such as labor income tax, money growth, and interest rates cannot fully account for the distortions in the Japanese labor market.