Could an economy get stuck on a rational pessimism sunspot path? The case of Japan

Le, Vo Phuong Mai ORCID: https://orcid.org/0000-0003-3374-9694, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947 and Minford, Patrick ORCID: https://orcid.org/0000-0003-2499-935X 2025. Could an economy get stuck on a rational pessimism sunspot path? The case of Japan. Journal of International Financial Markets, Institutions and Money 101 , 102142. 10.1016/j.intfin.2025.102142

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Abstract

Developed economies have experienced slower growth since the 2008 financial crisis, creating fears of “secular stagnation.” Rational expectations models have forward-looking sunspot solutions, which could cause this; here we investigate the case of Japan. We show that a New Keynesian model with a weak equilibrium growth path driven by pessimism sunspot belief shocks matches Japanese economic behaviour. Another possibility is a conventional model where productivity growth has simply slowed down for unknown reasons. Nevertheless, a welfare-optimising approach implies fiscal policy should commit to eliminating the potential sunspot while being prepared to revert to normal policy if inflation rises.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Professional Services > Advanced Research Computing @ Cardiff (ARCCA) Schools > Business (Including Economics)
Publisher:	Elsevier
ISSN:	1042-4431
Date of First Compliant Deposit:	26 February 2025
Date of Acceptance:	23 February 2025
Last Modified:	18 Mar 2025 10:00
URI:	https://orca.cardiff.ac.uk/id/eprint/176503

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