Credit constraints and the current account: A test for the Japanese economy

This paper constructs a small open economy version of the Kiyotaki and Moore [1997. Credit cycles. Journal of Political Economy 105 (2), 211-248] model along the line developed by Kasa [1998. Borrowing constraints and asset market dynamics: evidence from Pacific Basin. Federal Reserve Bank of San Francisco Economic Review (3), 17-28] and derives a closed-form solution of the current account dynamics. Using the solution, a null hypothesis of no credit constraints is tested for the Japanese economy. The empirical results show that the null hypothesis is strongly rejected and that the estimated signs of the parameters are consistent with the model. The Kiyotaki and Moore model would give an adequate description of the Japanese economy.