Phillips Correlation and Price‐Change Distributions under Declining Trend Inflation

Sohei Kaihatsu, Mitsuru Katagiri and Noriyuki Shiraki

Journal of Money, Credit and Banking, 2023, vol. 55, issue 5, 1271-1305

Abstract: The relationship between inflation dynamics and micro‐level pricing behavior is an underexplored research area. In this article, we first document that deflationary periods in Japan were associated with (i) variations in the distribution of price changes at the micro level, and (ii) a weakening in the Phillips correlation at the macro level. We construct a multisector general equilibrium model with sector‐specific menu costs, a feature that is supported by our estimation using sectoral data, and show that declining trend inflation and an increasing share of services in private consumption together can quantitatively explain the above two observations.

Date: 2023
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https://doi.org/10.1111/jmcb.12921

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:55:y:2023:i:5:p:1271-1305

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