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Inflation Dynamics And Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach For Japan'S Economy

  • HIBIKI ICHIUE
  • TAKUSHI KUROZUMI
  • TAKEKI SUNAKAWA

Which labor market specification is better able to describe inflation dynamics, a widely-used sticky wage model or a recently-investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan’s data. This paper shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out-of-sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross-correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.

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File URL: http://hdl.handle.net/10.1111/j.1465-7295.2011.00428.x
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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 51 (2013)
Issue (Month): 1 (01)
Pages: 273-287

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Handle: RePEc:bla:ecinqu:v:51:y:2013:i:1:p:273-287
DOI: j.1465-7295.2011.00428.x
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