A Comparison of Japanese and US New Keynesian Phillips Curves with Bayesian VAR-GMM

Takushi Kurozumi and Ryohei Oishi

No 22-E-3, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We compare Japanese and US inflation dynamics during the post-Global Financial Crisis period by utilizing Bayesian VAR-GMM to estimate several specifications of the New Keynesian Phillips curve. With the estimation method, we derive expectations in the Phillips curve from a VAR and analyze the formation of inflation expectations explicitly. We select the specification with variable elasticity of demand for Japan and that with sticky information for the US, using quasi-marginal likelihood. The selected specifications show that the persistence of inflation expectations formation is higher and trend inflation is lower in Japan than in the US. These findings account for persistently weak inflation developments in Japan: in the presence of firms' cautious price-setting behavior that reflects the purchasing attitude of consumers who are sensitive to price increases, inflation remains low and induces, through the highly persistent formation of inflation expectations, low expected future inflation and hence low trend inflation, which in turn put downward pressure on present inflation through the Phillips curve.

Keywords: New Keynesian Phillips curve; Inflation expectations formation; Variable elasticity of demand; VAR-GMM; Bayesian method (search for similar items in EconPapers)
JEL-codes: C11 C26 C52 E31 (search for similar items in EconPapers)
Date: 2022-03-22
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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