Time varying pass-through: Will the yen depreciation help Japan hit the inflation target?

Etsuro Shioji

No 50, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: There is a growing recognition that pushing up the public’s inflation expectation is a key to a successful escape from a chronic deflation. The question is how this can be achieved when the economy is stuck in a liquidity trap. This paper argues that, for Japan, the currency depreciation since the late 2012 could turn out to be useful for ending the country’s long battle with falling prices. Prior studies have suggested that household expectations are greatly influenced by prices of items that they purchase frequently. This paper demonstrates that the extent of exchange rate pass-through to those prices, once near-extinct, has come back strong in recent years. Evidence based on VARs as well as TVP-VARs indicates that a 25% depreciation of the yen would produce a 2% increase in the prices of goods that households purchase regularly.

Keywords: exchange rate; pass-through; expected inflation; CPI by purchase frequency class; time series analysis. (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-03
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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