Trends, Cycles and Lost Decades: Decomposition from a DSGE Model with Endogenous Growth

In this paper we incorporate endogenous productivity growth into a medium-scale new Keynesian dynamic stochastic general equilibrium (DSGE) model, to which a new shock regarding R&D activities is added. By matching the model parameters to the Japanese economy from 1980:Q2 to 2013:Q4 and decomposing the output into trend and cycle components, we find that the stagnation of the so-called lost decades was caused by a decline in economic growth as well as major recessions in the business cycle. The common trend estimated by our model is based on multiple time series data and is much more volatile than the trend extracted by either the Hodrick-Prescott or the band-pass filter.