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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2017 > (Research Paper) Phillips Curve and Price-Change Distribution under Declining Trend Inflation
May 26, 2017
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 (1) a remarkable shift in cross-sectional price-change distributions at the micro level and (2) 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.
E31, E32, E52
Phillips curve, Price-change distribution, Menu cost, Service price rigidity, Deflation, Trend inflation.
This research project started when the authors belonged to the Monetary Affairs Department at the Bank of Japan. We would like to thank the staff of the Bank of Japan for their helpful comments. We also would like to thank Rie Yamaoka and Yuko Ishibashi for resourceful research assistance. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan or the International Monetary Fund.
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