Ryuichi Nakagawa

Herd Behaviour by Japanese Banks after Financial Deregulation

This paper investigates whether Japanese banks followed herd behaviour during the 1980s and 1990s. The results indicate the existence of herding during the sample period, while the inefficiency of herding is concentrated in the early to mid 1980s, the period immediately after financial deregulation began. Evidence for the inefficient herding is observed in the behaviour of banks that made loans to new borrowers, and in the behaviour of banks that followed the type of banks that were more informed on lending to new borrowers. On the other hand, inefficient herd behaviour is rarely observed in the 1990s.

Equilibrium Indeterminacy under Forward-Looking Interest Rate Rules

Why is the rational expectations equilibrium locally indeterminate if the central bank raises the nominal interest rate too actively in response to a rise in expected inflation? This is because although the bank succeeds in stabilizing the expectations of the future economy, it allows the current economy to arbitrarily fluctuate. This indeterminacy expands in dimension as the forecast horizon of the rule becomes long.

Learnability of Heterogeneous Misspecification Equilibrium

This paper investigates the learnability of an equilibrium where agents formulate their forecasts under adaptive learning with heterogeneously misspecified econometric models; the equilibrium is called a Heterogeneous Misspecification Equilibrium (HME). The paper finds that the learnability condition of the HME is equal to or less than the condition of the equilibrium under learning with a correctly specified model; that is, heterogeneous misspecification in adaptive learning never makes an equilibrium less learnable. Thus, in a basic New Keynesian model with a Taylor-type monetary policy rule, the central bank should follow the Taylor principle to ensure the learnability of an equilibrium, regardless of whether heterogeneous misspecification exists or not.

Taylor Principle and Indeterminacy under Financial Market Imperfection

This paper investigates the impact of a financial market imperfection on the conditions that monetary policy rules must satisfy for the determinacy of a rational-expectations equilibrium. A financial market imperfection can disturb intertemporal substitution in certain cases. If a financial market is sufficiently imperfect, this imperfection can cause the real interest rate elasticity of aggregate demand to become positive. In this case, the Taylor principle is not the unique necessary and sufficient condition for monetary policy rules to ensure determinacy. If the central bank responds to current inflation, then the Taylor principle is a sufficient, but not a necessary, condition. Moreover, if the bank responds to expected inflation, the Taylor principle is neither a necessary nor a sufficient condition. Our calibration results suggest that it may be dangerous for a central bank to adhere solely to the Taylor principle when real financial markets are immature or bankrupt, as was the case for the Japanese market during the 1990s.