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An Empirical Study on the New Keynesian Wage Phillips Curve

: Japan and the US

February 24, 2014
Ichiro Muto*1
Kohei Shintani*2

Abstract

We present an empirical analysis on the New Keynesian Wage Phillips Curve (NKWPC), which is derived by Gali (2011) as a micro-founded structural relationship between wage inflation and the unemployment rate under a sticky wage framework using data for Japan and the US. We find that the empirical fit of the NKWPC is generally superior for Japan. We also find that the slope of the NKWPC is much steeper in Japan than in the US. These results suggest that wages are less sticky in Japan than in the US. Inflation indexation plays a key role in the US, but is less important in Japan. Rolling estimations indicate that the NKWPC has flattened over time in Japan. Analysis of recent data indicates that in both countries the role of inflation indexation is quantitatively smaller than before, although this result might be influenced by low and stable inflation rates over the past few decades.

JEL Classifications
E24, E31, E32

Keywords
Wage; Unemployment rate: New Keynesian model; Phillips curve

The authors are grateful to Kosuke Aoki, Ichiro Fukunaga, Daisuke Ikeda, Koichiro Kamada, Seisaku Kameda, Mitsuru Katagiri, Munechika Katayama, Ryo Kato, Tomiyuki Kitamura, Takushi Kurozumi, Eiji Maeda, Koji Nakamura, Kenji Nishizaki, Takemasa Oda, Hiroyuki Oi, and other staffs at the Bank of Japan for their advice and comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  • *1   Research and Statistics Department (currently Financial System and Bank Examination Department)
    E-mail : ichirou.mutou@boj.or.jp
  • *2   Research and Statistics Department
    E-mail : kouhei.shintani@boj.or.jp

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