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The Estimation of the New Keynesian Phillips Curve in Japan and Its Implication for the Inflation Response to a Monetary Policy Shock

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  • Masahiko Shibamoto

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

The New Keynesian Phillips Curve (NKPC) is a key building block in many modern macroeconomic models. This study assesses the empirical fit of the NKPC in Japan by estimating a variety of its specifications. Some empirical results suggest that introducing nominal interest rates into the pure forward-looking NKPC, which implies the existence of a cost channel for monetary policy, helps improve their ability to explain Japanese inflation dynamics. In addition to the existence of the cost channel for monetary policy, these results show that the use of labor share (real unit labor costs) is an important factor in estimating the NKPC. As an implication of these findings, this study proposes that, in the context of the New Keynesian economics, both the existence of the cost channel for monetary policy and the sluggish adjustment of real unit labor costs can account for the fact that there is a long time lag between a monetary policy shock and its impact on inflation.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp235.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 235.

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Length: 45 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:kob:dpaper:235

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Keywords: New Keynesian Phillips Curve; Cost Channel of Monetary Policy; Inflation Responses to a Monetary Policy Shock;

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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  2. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  3. Kurmann, Andre, 2005. "Quantifying the uncertainty about the fit of a new Keynesian pricing model," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1119-1134, September.
  4. Rudd, Jeremy & Whelan, Karl, 2005. "Modelling Inflation Dynamics: A Critical Review of Recent Research," Research Technical Papers 7/RT/05, Central Bank of Ireland.
  5. Blanchard, Olivier J & Galí, Jordi, 2005. "Real Wage Rigidities and the New Keynesian Model," CEPR Discussion Papers 5375, C.E.P.R. Discussion Papers.
  6. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Rudd, Jeremy & Whelan, Karl, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics," Research Technical Papers 5/RT/03, Central Bank of Ireland.
  8. Ichiro Muto, 2009. "Estimating A New Keynesian Phillips Curve With A Corrected Measure Of Real Marginal Cost: Evidence In Japan," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 667-684, October.
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