Nonlinear Input Cost Pass-through to Consumer Prices: A Threshold Approach
May 22, 2023
This paper examines a possible nonlinearity in the pass-through to CPI inflation of increases in firms' input costs. Using Japanese data, the paper empirically investigates whether the degree of the pass-through rises when increases in costs exceed a certain threshold. Three main empirical results are obtained. First, there is a statistically significant nonlinearity in that the pass-through to CPI inflation of increases in producer prices, exchange rates, and wages rises once the increase in each of these variables exceeds a certain threshold. Second, our nonlinear model is superior to the linear model used in previous studies in terms of in-sample model fit and out-of-sample forecasting performance, suggesting that the linear model underestimates the degree of the pass-through of an input-cost increase that exceeds the threshold while overestimating that of a smaller input-cost increase. Third, the estimated impact of the nonlinear pass-through of increases in producer prices and exchange rates on CPI inflation is often transitory, whereas that of wage growth tends to be persistent due to the observed higher inertia in wage growth. These results suggest that whether a nonlinearity will arise in the pass-through of wage growth is one of the most important issues for future developments in CPI inflation.
- JEL classification
- C24, E31, E58
- Inflation, Pass-through, Nonlinearity, Threshold model
The authors are grateful to Luiggi Donayre, Toyoichiro Shirota, Benjamin Wong, seminar participants at the 30th SNDE Annual Symposium, and staff members of the Bank of Japan for their valuable comments and discussions. The authors also thank Atsuki Hirata for excellent research assistance. All remaining errors are attributable to the authors. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan.
- *1Monetary Affairs Department, Bank of Japan
E-mail : firstname.lastname@example.org
- *2Monetary Affairs Department, Bank of Japan
E-mail : email@example.com
- *3Institute of Economic Research, Hitotsubashi University and Monetary Affairs Department, Bank of Japan
E-mail : firstname.lastname@example.org
Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact the authors.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (email@example.com) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.