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Phillips Curve and Price-Change Distribution under Declining Trend Inflation

Sohei Kaihatsu, Mitsuru Katagiri and Noriyuki Shiraki ()
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Mitsuru Katagiri: Bank of Japan

No 17-E-5, Bank of Japan Working Paper Series from Bank of Japan

Abstract: The relationship between the price-setting behaviors at the micro level and the inflation dynamics at the macro level is an underexplored research area. In this paper, we first document that (i) a remarkable shift in cross-sectional price-change distributions at the micro level and (ii) a flattening of Phillips curve at the macro level were simultaneously observed in Japan, from the high-inflation periods until the mid-1990s to the low-inflation periods afterward. We, then, empirically show that the menu-cost hypothesis fits the price-setting behavior in Japan and construct a multi-sector general equilibrium model with a higher menu cost in the services sector based on our empirical findings. The quantitative exercise using the model indicates that the above observations at the micro and macro level in Japan can be consistently replicated within a unified model under the declining average inflation and the increasing share of services in output.

Keywords: Phillips curve; Price-change distribution; Menu cost; Service price rigidity; Deflation; Trend inflation (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-mac and nep-mon
Date: 2017-05-26
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