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A Comparison of Japanese and US New Keynesian Phillips Curves with Bayesian VAR-GMM


March 22, 2022
Takushi Kurozumi*1
Ryohei Oishi*2


We compare Japanese and US inflation dynamics during the post-Global Financial Crisis period by utilizing Bayesian VAR-GMM to estimate several specifications of the New Keynesian Phillips curve. With the estimation method, we derive expectations in the Phillips curve from a VAR and analyze the formation of inflation expectations explicitly. We select the specification with variable elasticity of demand for Japan and that with sticky information for the US, using quasi-marginal likelihood. The selected specifications show that the persistence of inflation expectations formation is higher and trend inflation is lower in Japan than in the US. These findings account for persistently weak inflation developments in Japan: in the presence of firms' cautious price-setting behavior that reflects the purchasing attitude of consumers who are sensitive to price increases, inflation remains low and induces, through the highly persistent formation of inflation expectations, low expected future inflation and hence low trend inflation, which in turn put downward pressure on present inflation through the Phillips curve.

JEL classification
E31, C11, C26, C52

New Keynesian Phillips curve; Inflation expectations formation; Variable elasticity of demand; VAR-GMM; Bayesian method

The authors are grateful to Kosuke Aoki, Junko Koeda, Jouchi Nakajima, Mototsugu Shintani, Toshiaki Watanabe, Tsutomu Watanabe, and colleagues at the Bank of Japan for comments and discussions. Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan.

  1. *1Monetary Affairs Department, Bank of Japan
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  2. *2Monetary Affairs Department, Bank of Japan
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