Understanding Post-Pandemic Inflation in Japan and the U.S.: A Narrative Sign Restriction Approach

Kaori Ochi
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Kaori Ochi: Bank of Japan

No 26-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Following the COVID-19 pandemic, the surge in inflation which defined its aftermath created a heightened interest amongst academics and policy makers to identify the structural factors of inflation dynamics. Against this backdrop, this paper uses a structural vector autoregression (SVAR) with narrative sign restrictions to characterize how the inflation episode of the COVID-19 pandemic compared across Japan and the U.S. The findings are threefold: (1) Japan and the U.S. share similar cyclical patterns in the sense that the initial inflation run-up was driven by supply and global shocks, followed by pent-up demand factors, which ultimately led to inflationary pressures from labor market tightening shocks, (2) labor market tightness shows the non-negligible contributions on inflation for both countries, and (3) narrative sign restrictions are informative as a strategy for the identification of structural shocks.

Keywords: Inflation; structural vector autoregression; labor market tightness; narrative sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 E31 (search for similar items in EconPapers)
Date: 2026-03-05
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