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Long-run Growth and Short-run Stabilization

Essays in Memory of Albert Ando

Edited by Lawrence R. Klein

There is much confusion in the economics literature on wage determination and the employment–inflation trade-off. Few model builders pay as much careful attention to the definition and meaning of long-run concepts as did Albert Ando. Expanding on years of painstaking work by Ando, the contributors elaborate on the main issues of economic analysis and policies that concerned him.
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Chapter 10: The Over-Investment Hypothesis

Fumio Hayashi


* Fumio Hayashi INTRODUCTION Albert Ando’s last published work (Ando et al. (2003)) may well be the most provocative of all his writings. His thesis, which I call the ‘over-investment hypothesis’, is in stark contrast to the existing hypotheses about the Japanese malaise of the 1990s, all of which claim that corporate investment is less than optimal or just about right. A simple theoretical illustration very briefly described at the end of his paper, meant to explain his empirical findings, forces us to re-examine the sort of models we may wish to rely on to develop our thoughts. In this chapter, I corroborate his empirical findings about the Japanese economy and formulate his hypothesis in a dynamic general equilibrium framework. In Section 2, I will summarize Ando’s thesis and the supporting empirical evidence he assembled in his paper. I will then present, in Section 3, some additional corroborating evidence that became available in the latest release of the Japanese National Accounts. In Section 4, I will place his own theoretical illustration of the over-investment hypothesis in an explicit dynamic general equilibrium model. The concluding section, Section 5, will briefly comment on the relevance of the hypothesis to Japan’s lost decade of the 1990s. 2. ANDO’S THESIS The hypothesis that Ando puts forth in Ando et al. (2003) is very clear and simple: the Japanese corporations have over-invested for decades. Excessive investment is of course harmful to shareholders. Ando et al. note that corporate governance in Japan is weak for...

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