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

Author

Listed:
  • Takushi Kurozumi

    (Bank of Japan)

  • Ryohei Oishi

    (Bank of Japan)

Abstract

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.

Suggested Citation

  • Takushi Kurozumi & Ryohei Oishi, 2022. "A Comparison of Japanese and US New Keynesian Phillips Curves with Bayesian VAR-GMM," Bank of Japan Working Paper Series 22-E-3, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp22e03
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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