Inflation dynamics and labor market specifications: a Bayesian DSGE approach for Japan's economy

Hibiki Ichiue (), Takushi Kurozumi and Takeki Sunakawa

MPRA Paper from University Library of Munich, Germany

Abstract: Which labor market specification is better able to describe inflation dynamics, a widely-used sticky wage model or a recently-investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan’s data. This paper shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out-of-sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross-correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.

Keywords: Inflation dynamics; Marginal cost; Labor market search; Extensive margin; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E24 E32 E37 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
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Related works:
Journal Article: INFLATION DYNAMICS AND LABOR MARKET SPECIFICATIONS: A BAYESIAN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH FOR JAPAN'S ECONOMY (2013)
Working Paper: Inflation Dynamics and Labor Adjustments in Japan: A Bayesian DSGE Approach (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:33391

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