Japanese Economy Essay

1204 words - 5 pages

We study a large dataset on Japanese consumer prices with two distinct features: low inflation rates and high frequency of price changes. Overall, the probability of price changes for traded goods tends to be strongly driven by information on past macroeconomic aggregates, rather than on previous price changes. The same conclusion, however, does not necessarily hold for non-traded goods. These results are consistent across different samples and under a variety of robustness checking schemes. A menu costs model is then augmented with capital accumulation and endogenous investment costs to account for these facts. The model performs reasonably well in terms of capturing these salient features ...view middle of the document...

One key result is that the probability of price changes tends to be driven by information on past macroeconomic aggregates, rather than previous price changes. While at odds with the more popular Calvo pricing models, this result fits nicely with the implications of the current state-dependent pricing models in the spirit of Golosov and Lucas (2007) and Nakamura and Steinsson (2010).
One natural question remains as to whether we can reconcile these facts with the current theoretical literature on micro-pricing. Japan's low inflation rates and high frequency of price changes create a rather unusual environment for the current state-dependent pricing models because these models are typically calibrated to match moments of either (1) an economy with low inflation and low frequency of price adjustment (e.g., Nakamura and Steinsson (2010)) or (2) an economy with high inflation and high frequency of price adjustment (e.g., Gagnon (2009)).2 The model presented here combines key features of these existing menu costs model in the New Keynesian tradition (e.g., Golosov and Lucas (2007) and Gagnon (2009)) and inventories models à la Deaton and Laroque (1996), Midrigan (2011), and Khan and Thomas (2007). Some stylized features of the model are: (1) the economy consists of households, finals goods firms, a capital rental firm, and monopolistic intermediate goods firms, (2) intermediate goods firms decides how much labor to hire, and how much capital to employ, depending on the demand shock realized at period . To fix ideas, let us consider a standard set-up in the New-Keynesian tradition, in which firms are monopolistic competitors. Since prices of inputs are expected to decrease in the next period, firms would have incentives to withhold their purchase of inputs. This short-term decrease in demand for outputs of intermediate firms can thus create a self-fulfilling circle in which deflationary expectations can recursively ramp up significant disturbances in real aggregate demands.
This paper is related to the vast literature on menu costs models, many of which are built upon the influential works by Caplin and Leahy (1991) and Sheshinski and Weiss (1977). Nakamura and Steinsson (2010) calibrate a menu cost model using U.S. retail data and report a degree of monetary non-neutrality that is three times larger in a multi-sector setting than in a single sector setting. This conclusion dovetails nicely with Caplin and Leahy (1991), who suggest that changes in monetary policies often have no effects on real aggregate demands in the short run. Along these lines, Gagnon (2009) calibrates a menu-cost model in the spirit of Golosov and Lucas (2007) using Mexican retail data. The high volatility of retail price in this data-set poses a...

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