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Defining Price Stability in Japan: A View from America

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  • Christian Broda

    (University of Chicago, Graduate School of Business, and National Bureau of Economic Research (E-mail: cbroda@chicagogsb.edu))

  • David E. Weinstein

    (Columbia University and National Bureau of Economic Research (E-mail: dew35@columbia.edu))

Abstract

Japanese monetary and fiscal policy uses the consumer price index (CPI) as a metric for price stability. Despite a major effort to improve the index, the Japanese methodology of calculating the CPI seems to have a large number of deficiencies. Little attention is paid in Japan to substitution biases and quality upgrading. This implies that important methodological differences have emerged between the United States and Japan since the former started to correct for these biases in 1999. We estimate that using the new corrected U.S. methodology, Japanfs deflation averaged 1.2 percent per year since 1999. This is more than twice the deflation suggested by Japanese national statistics. Ignoring these methodological differences is misleading, because it would suggest that U.S. real per capita consumption growth has been growing at a rate that is almost 2 percentage points higher than that of Japan between 1999 and 2006. When a common methodology is used, Japanfs growth has been much closer to that of the United States over this period. Moreover, we estimate that the bias of the Japanese CPI relative to a true cost-of- living index is around 2 percent per year. This overstatement in the Japanese CPI in combination with Japanfs low inflation rate is likely to cost the government more than \69 trillion?or 14 percent of GDP?over the next 10 years in increased Social Security transfers and debt service. For monetary policy, the overstatement of inflation suggests that if the BOJ adopts a formal inflation target without changing the current CPI methodology, a lower band of less than 1.8 percent would not achieve its goal of price stability.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 25 (2007)
Issue (Month): S1 (December)
Pages: 169-206

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Handle: RePEc:ime:imemes:v:25:y:2007:i:s1:p:169-206

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Keywords: Inflation; Consumer price index bias; Monetary policy;

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References

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  1. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004 277, Society for Computational Economics.
  2. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
  3. Shiratsuka, Shigenori, 1999. "Measurement Errors in the Japanese Consumer Price Index," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 69-102, December.
  4. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
  5. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  6. Shigenori Shiratsuka, 1999. "Measurement errors in Japanese Consumer Price Index," Working Paper Series WP-99-2, Federal Reserve Bank of Chicago.
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Cited by:
  1. Masashige Hamano, 2013. "The consumption-real exchange rate anomaly with extensive margins," CREA Discussion Paper Series 13-01, Center for Research in Economic Analysis, University of Luxembourg.
  2. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," NBER Working Papers 11043, National Bureau of Economic Research, Inc.
  3. David Weinstein & Christian Broda, 2008. "Exporting deflation? Chinese exports and Japanese prices," Working Paper Series 2008-29, Federal Reserve Bank of San Francisco.
  4. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas.
  5. Masashige Hamano, 2013. "On business cycles of variety and quality," CREA Discussion Paper Series 13-21, Center for Research in Economic Analysis, University of Luxembourg.
  6. Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc.

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