Asset Price Deflation Research Articles

Secular Stagnation as a Result of Economic Maturity or Deepening Underdevelopment?

In this article, we critique the secular stagnation hypothesis and offer an alternative theoretical framework capable of more fully explaining the current economic trajectory of developing countries: falling interest rates, asset price deflation, and falling investment.

Inflation? It’s Import Prices and the Labor Share!

Recognizing that inflation of the value of output and its costs of production must be equal, we focus on a cost-based macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis. For decades the import and profit shares of cost have risen, while the wage share has declined to around 50% with money wage increases lagging the sum of growth rates of prices and productivity. Conflicting claims to income are the underlying source of inflationary pressure. Contemporary structuralist theory suggests that conflicting income claims set the inflation rate. Firms can mark up costs but workers have latent bargaining power over the labor share that they can exercise. Import costs and policy repercussions complicate the picture, but a simple vector error correction model and visual analysis suggest that money wages would have to grow 1% point faster than prices plus productivity for several years if the Fed is to meet a 3% inflation target. The results pose a Biden policy trilemma: (i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth), (ii) which would provoke faster inflation with feedback to rising interest rates, and (iii) the resulting asset price deflation likely facing political resistance from Wall Street and affluent households.

Inflation? It’s Import Prices and the Labor Share!

Recognizing that inflation of the value of output and its costs of production must be equal, we focus on a cost-based macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis. For decades the import and profit shares of cost have risen, while the wage share has declined to around 50% with money wage increases lagging the sum of growth rates of prices and productivity. Conflicting claims to income are the underlying source of inflationary pressure. Inflation affects income (labor’s spending power) and wealth. Monetarist theory around 1900 concentrated on the latter (Bryan and the “Cross of Gold)” leading to the standard Laffer curve. It was replaced by the Friedman-Phelps model which has incorrect dynamics (labor payments do not fall during an expansion – they go up). Samuelson and Solow introduced a version of the Phillips curve that violates macroeconomic accounting. Rational expectations replaced Friedman but was immediately falsified by output drops after the Volcker shock treatment around 1980. There followed a complicated transition from rational expectations to inflation targeting, anchored by economists’ misunderstanding of the physical meaning of ergodicity and ontological blindness. It did not help that the real balance effect is irrelevant because money makes up a small part of wealth. Rather than issuing veiled threats of disaster if its policy advice is not followed, the Fed now announces inflation targets which it cannot meet. Contemporary structuralist theory suggests that conflicting income claims set the inflation rate. Firms can mark up costs but workers have latent bargaining power over the labor share that they can exercise. Import costs and policy repercussions complicate the picture, but a simple vector error correction model and visual analysis suggest that money wages would have to grow one percentage point faster than prices plus productivity for several years if the Fed is to meet a three percent inflation target. The results pose a Biden policy trilemma: (i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth), (ii) which would provoke faster inflation with feedback to rising interest rates, and (iii) the resulting asset price deflation likely facing political resistance from Wall Street and affluent households.

Fisherian Asset Price Deflation and the Zero Lower Bound

We study the effects of the Zero Lower Bound (ZLB) on the severity of financial crises using an incomplete markets New Keynesian model with two occasionally binding constraints: a ZLB on the nominal interest rate and a borrowing constraint tied to an asset price. The model's financial wedge corresponds to an endogenous multiplier on the borrowing constraint. Binding ZLB exacerbates financial crises through its interaction with the asset fire-sale vicious cycle, driving up the financial wedge. Our results offer a novel reinterpretation of the negligible effect of the ZLB in representative agent New Keynesian models with exogenous wedges.

Could COVID-19 Lead to Another Great Depression? Evidence from the USA and Australia

Numerous business leaders such as Softbank CEO Masayoshi Son have recently expressed concern at the potential for the current COVID-19 pandemic leading to another Great Depression (1929-1931). This article compares four key economic indicators leading up to the Great Depression with current economic conditions in the USA and Australia to draw some insights and conclusions regarding the plausibility of this concern. The indicators for comparison are (1) household debt (2) real estate markets (3) stock markets and (4) business turnover. The main finding is that both periods share a common and disturbing narrative: that the prevalence of inflated asset prices (shares then, real estate now) have driven high rates of private consumption and debt, posing the risk that asset price deflation will lead to consumption collapsing resulting in sizable correction.

Is Bank-centered Corporate Governance Worth It? A Cross-sectional Analysis Of The Performance Of Japanese Firms During The Asset Price Deflation

This paper examines the determinants of firm stock-price performance from 1990 to 1993 in Japan. During that period of time, the typical firm on the Tokyo Stock Exchange lost more than half its value and banks experienced severe adverse shocks. We show that firms whose debt had a higher fraction of bank loans in 1989 performed worse from 1990 to 1993. This effect is statistically as well as economically significant and holds when we control for a variety of variables that affect performance during this period of time. We find that firms that were more bank-dependent also invested less during this period than other firms. This evidence points to an adverse effect of bank-centered corporate governance, namely that firms suffer when their banks are experiencing difficulties.

Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests

We examine the view that the recent East Asian crisis was precipitated by bursting asset price bubbles, which had been fuelled by strong capital inflows that were largely the result of a moral hazard problem in financial intermediation, and was exacerbated by a vicious cycle of asset price deflation and incipient and actual capital flight. We find evidence of stock market bubbles in all East Asian economies examined, although not in Australia. We examine various categories of capital flows to these countries and find, in particular, relatively high reversible components in portfolio flows to East Asian economies.

The Morning After: Explaining the Slowdown in Japanese Growth in the 1990's

This paper uses vector autoregressions (VARs) to investigate four explanations of the extended slump in Japanese economic activity during the 1990s: the absence of bold and consistent fiscal stimulus; limited room for expansionary monetary policy because of a liquidity trap; asset price deflation reflecting the long-term problems caused by overinvestment, inadequate returns on saving, and debt overhang; and disruption of financial intermediation. The results indicate that disruption in financial intermediation, largely operating through the impact of changes in domestic asset prices on bank lending, has been the principal case of the slump.

PSR—an efficient stock-selection tool?

In this paper we examine the simple investment factor in the Tokyo Stock Exchange (TSE). In the past, many papers have pointed out the existence of a book to market ratio of equity (PBR) anomaly in Japan. If we create portfolios with low-PBR equities, we could beat the TOPIX. Despite the asset price deflation, which started in 1991, especially in land and stock prices, the PBR was not the most efficient investment indicator in the TSE. We compare PBR, PER (earnings to market ratio) and PSR (sales to market ratio) from 1982 onwards. Over a 14-year period, the low-PSR equities beat the low-PBR and low-PER portfolio 6 times. Statistically, we calculate the IC (Information Coefficient) score between investment variables and return. Results show that the low-PSR IC score exceeds the other investment indicators, including market capitalization size. Among the 100 companies with low PSRs are industries not found on the list of low PERs and low PBRs. Thus, investors who base stock selection on PSR have a wider range of industries to choose from, which reduces the portfolio risk. We also examine the variety of selection for each factor. From the economic viewpoint, PSR is composed of asset turnover and leverage. Asset turnover is sensitive to business cycles, while leverage is significantly influenced by a company's management strategy. In economic recovery phases since the fiscal year 1970, year-to-year sales of the companies listed on the TSE first section (excluding financial and insurance sectors) went up when the business DI coincident index also increased, year-to-year.

The 1985 to 1994 Global Real Estate Cycle: An Overview

The globalization of financial markets is affecting real estate markets. During the period 1985 to 1994, a large number of countries experienced strong real estate booms that peaked around 1989 followed by severe asset price deflation and an output contraction that usually lasted until 1994. Global finance appears irreversible. Should we also expect the recurrence of real estate cycles of strong amplitude? Or does this first global cycle represent a one-time adjustment to global integration happening in many countries simultaneously? To facilitate further comparative analyses, this article inventories the international and domestic factors, in their macroeconomic and intrinsic real estate cycle dimensions, that contributed to this strong global cycle. This overview has three threads: What triggered this first global cycle? What has been its impact? Are there lessons for countries that are not yet fully integrated into global capital markets such as semireformed socialist economies, newly industrialized economies, and other developing countries?II y a quelque chose de commun entre l'art du puzzle et l'art du go; seules les pièces rassemblées prendront un caractère lisible, prendront un sens: considèrée isolément une piece d'un puzzle ne veut rien dire, elle est seulement question impossible, défi opaque.—George Perec, La vie, mode d'emploi1