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Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan

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Abstract

It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, albeit moderately negative, inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. Our analysis sheds light on the determinants of the time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore.

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Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/14.

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Length: 51 p.
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:nzb:nzbdps:2007/14

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Citations

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Cited by:
  1. Sarah M. Lein & Eva Köberl, 2009. "Capacity Utilisation, Constraints and Price Adjustments under the Microscope," KOF Working papers 09-239, KOF Swiss Economic Institute, ETH Zurich.
  2. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Economics Working Paper Archive 580, The Johns Hopkins University,Department of Economics.
  3. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.
  4. Emmanuel De Veirman & Andrew T. Levin, 2011. "Cyclical Changes in Firm Volatility," CAMA Working Papers 2011-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Sudhanshu Kumar & Naveen Srinivasan & Muthiah Ramachandran, 2012. "A time-varying parameter model of inflation in India," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 25-50, April.
  6. André Meier, 2010. "Still Minding the Gap - Inflation Dynamics during Episodes of Persistent Large Output Gaps," IMF Working Papers 10/189, International Monetary Fund.
  7. Jeffrey C. Fuhrer & Giovanni P. Olivei & Geoffrey M. B. Tootell, 2011. "Inflation dynamics when inflation is near zero," Working Papers 11-17, Federal Reserve Bank of Boston.
  8. Alfonso Palacio Vera, 2008. "Money wage rigidity, monopoly power and hysteresis," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 08-02, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  9. Alberto Musso & Livio Stracca & Dick van Dijk, 2007. "Instability and nonlinearity in the Euro area Phillips curve," Working Paper Series 811, European Central Bank.
  10. Wimanda, Rizki E. & Turner, Paul M. & Hall, Maximilian J.B., 2011. "Expectations and the inertia of inflation: The case of Indonesia," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 426-438, May.

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