Abstract
AbstractWe study the dynamics of consumption, the real interest rate and measures of labour input in Japan over the period from 1985 to 2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest‐rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the generalized methods of moments shows that the mid‐1990s are characterized by breaks in the structural parameters governing household consumption and labour supply decisions. Specifically, following the tax hike and during the low nominal rate period, Japanese households became less risk averse and exhibited a higher degree of habit formation.
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