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Hidden Stagflation

Yuta Takahashi and Naoki Takayama

No 733, Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We present evidence that the rise in inflation in Japan since 2014 is a result of a hidden stagflation: the relative prices of durable consumption and ICT investment goods stopped declining, reflecting technology stagnation and exerting an inflationary pressure on the economy and; the real side of the Japanese economy simultaneously started stagnating even further. We construct a multi-good monetary model to account for these facts together and quantify the impact of the technology stagnation on the aggregate inflation rate. We develop a new sign restriction approach to construct informative lower bounds to the impact of the technology stagnation on long-run inflation without relying on the exact Euler equation and some of the balanced growth path properties. By using the lower bounds, we find that inflation would be close to 0% or even negative without the technology stagnation. Moreover, the technology stagnation explains a sizable fraction of the observed slowdown in the real GDP and consumption growth. Our findings challenge the conventional view that Japan emerged from long-lasting deflation owing to the unconventional monetary policies. Finally, we apply our analysis to European countries and uncover the hidden stagflation there as well.

JEL-codes: E31 E43 E52 E58 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ict, nep-mac and nep-mon
Note: July 4, 2022
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:733

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