Asset price fluctuations in Japan: 1980-2000

In this paper, we try to account for the recent fluctuations in asset prices in Japan using a dynamic stochastic general equilibrium model. In our model, a key to explain the land-price fluctuation is how people's expectations about future productivity growth evolve over time. Specifically, by assuming adaptive learning on the growth rate of productivity, our model can replicate the Japanese land-price fluctuations over the period 1980-2000. However, even with adaptive learning, habit persistence, and costly capital accumulation, a substantial portion of the stock-price fluctuation is left unexplained, and a puzzle remains.