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Price Dynamics in Japan (1981-2001): A Structural Analysis of Mechanisms in the Goods and Labor Markets

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  • Canry, Nicolas
  • Fouquau, Julien
  • Lechevalier, Sébastien

Abstract

This paper aims to provide an alternative framework to previous studies of deflation in Japan. We focus on the real dimension of the price dynamics and propose an imperfect competition model, which describes a rent economy, where the formation of prices can be separated into the markup (level of the rent in the goods market) and the unit labor cost (distribution of the rent in the labor market). We use a panel industry dataset to analyze the impact of institutional and structural factors on the heterogeneous price dynamics of 10 manufacturing sectors. Although the evolution of unit labor costs seems to be the driving force of price dynamics in the manufacturing industry, our structural analysis leads to consider the importance of the increasingly competitive environment, as captured by rising import penetration. Along with the decline of bargaining power of the workforce, this is at the origin of the deflationary pressures that characterized the Japanese economy during the Lost Decade.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13461/1/DP493.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a493.

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Length: 39 p.
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:hit:hituec:a493

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Keywords: Deflation; Japanese Economy; Wage Bargaining; Markup; Deregulation; Panel Threshold Regression;

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  1. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August.
  2. Lynne Cockerell & Bill Russell, 1995. "Australian Wage and Price Inflation: 1971-1994," RBA Research Discussion Papers rdp9509, Reserve Bank of Australia.
  3. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  4. Peng Xu, 2004. "Bankruptcy Resolution in Japan: Civil Rehabilitation vs. Corporate Reorganization," Discussion papers 04010, Research Institute of Economy, Trade and Industry (RIETI).
  5. Anindya Banerjee & Bill Russell, 2000. "Industry Structure and the Dynamics of Price Adjstment," Dundee Discussion Papers in Economics 121, Economic Studies, University of Dundee.
  6. Dobbelaere, Sabien, 2004. "Estimation of price-cost margins and union bargaining power for Belgian manufacturing," International Journal of Industrial Organization, Elsevier, vol. 22(10), pages 1381-1398, December.
  7. Gary Saxonhouse, 2005. "Good deflation/bad deflation and Japanese economic recovery," International Economics and Economic Policy, Springer, vol. 2(2), pages 201-218, November.
  8. Morrison, C J, 1994. "The Cyclical Nature of Markups in Canadian Manufacturing: A Production Theory Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(3), pages 269-82, July-Sept.
  9. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  10. Hurlin, Christophe, 2006. "Network effects of the productivity of infrastructure in developing countries," Policy Research Working Paper Series 3808, The World Bank.
  11. Hans Genberg & Laurent L. Pauwels, 2004. "Wage-Price Dynamics and Deflation in Hong Kong," IHEID Working Papers 06-2004, Economics Section, The Graduate Institute of International Studies.
  12. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  13. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
  14. Taimur Baig, 2003. "Understanding the Costs of Deflation in the Japanese Context," IMF Working Papers 03/215, International Monetary Fund.
  15. Nishimura, Kiyohiko G. & Nakajima, Takanobu & Kiyota, Kozo, 2005. "Does the natural selection mechanism still work in severe recessions?: Examination of the Japanese economy in the 1990s," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 53-78, September.
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