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Phillips Curve and Price-Change Distribution under Declining Trend Inflation

Author

Listed:
  • Sohei Kaihatsu

    (Bank of Japan)

  • Mitsuru Katagiri

    (Bank of Japan)

  • Noriyuki Shiraki

    (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.

Suggested Citation

  • Sohei Kaihatsu & Mitsuru Katagiri & Noriyuki Shiraki, 2017. "Phillips Curve and Price-Change Distribution under Declining Trend Inflation," Bank of Japan Working Paper Series 17-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp17e05
    as

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    References listed on IDEAS

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    3. Yuto Iwasaki & Nao Sudo, 2017. "Myths and Observations on Unconventional Monetary Policy -- Takeaways from Post-Bubble Japan --," Bank of Japan Working Paper Series 17-E-11, Bank of Japan.

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    More about this item

    Keywords

    Phillips curve; Price-change distribution; Menu cost; Service price rigidity; Deflation; Trend inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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