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Imperfect Information, Heterogenous Demand Shocks, and Inflation Dynamics

Author

Listed:
  • Tatsushi Okuda

    (Bank of Japan)

  • Tomohiro Tsuruga

    (International Monetary Fund)

  • Francesco Zanetti

    (University of Oxford)

Abstract
Using sector-level survey data for the universe of Japanese firms, we establish the positive co-movement in the firm’s expectations about aggregate and sector-specific demand shocks. We show that a simple model with imperfect information on the current aggregate and sector-specific components of demand explains the positive co-movement of expectations in the data. The model predicts that an increase in the relative volatility of sector-specific demand shocks compared to aggregate demand shocks reduces the sensitivity of inflation to changes in aggregate demand. We test and corroborate the theoretical prediction on Japanese data and find that the observed decrease in the relative volatility of sector-specific demand has played a significant role for the decline in the sensitivity of inflation to movements in aggregate demand from mid-1980s to mid-2000s.

Suggested Citation

  • Tatsushi Okuda & Tomohiro Tsuruga & Francesco Zanetti, 2021. "Imperfect Information, Heterogenous Demand Shocks, and Inflation Dynamics," BCAM Working Papers 2104, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:2104
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    References listed on IDEAS

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    1. Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    2. Huw Dixon & Jeremy Franklin & Stephen Millard, 2023. "Sectoral Shocks and Monetary Policy in the United Kingdom," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(4), pages 805-829, August.
    3. Emmanuel De Veirman, 2022. "How Does the Phillips Curve Slope Vary with Repricing Rates?," Working Papers 735, DNB.
    4. Luca Gambetti & Dimitris Korobilis & John D. Tsoukalas & Francesco Zanetti, 2023. "Agreed and Disagreed Uncertainty," Working Paper series 23-01, Rimini Centre for Economic Analysis.

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    More about this item

    Keywords

    Imperfect information; Shock heterogeneity; Inflation dynamics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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