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Good deflation/bad deflation and Japanese economic recovery

  • Gary Saxonhouse

    ()

Many economists dismiss the role of positive supply shocks as a cause of Japan's deflation. Indeed, they attribute the long delay in Japan's recovery to the mistaken view that Japan's deflation reflects an acceleration of technological progress. Whatever the current situation in Japan, however, economic history certainly suggests that technological progress can go hand in hand with general deflation. Conducting a VAR analysis using very detailed information about the components of Japan's consumer price index, this paper finds that short-run shocks to Japan's relative price structure persist in the long run. Given this finding, it is possible to conclude that such shocks are real in origin and reflect technological change. As no effort has yet been completed to show the full extent to which technological change is driving short-run relative price change in Japan compared with other factors, and the full extent to which relative price changes are driving aggregate price change compared with other factors, the policy implications of these findings are unclear. What is clear is that it is a mistake to dismiss out of hand the possibility that technological shocks are playing an important role among other forces in Japan's current deflation.

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File URL: http://hdl.handle.net/10.1007/s10368-005-0035-z
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Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 2 (2005)
Issue (Month): 2 (November)
Pages: 201-218

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Handle: RePEc:kap:iecepo:v:2:y:2005:i:2:p:201-218
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  1. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
  2. Michael D. Bordo & John Landon Lane & Angela Redish, 2004. "Good versus Bad Deflation: Lessons from the Gold Standard Era," NBER Working Papers 10329, National Bureau of Economic Research, Inc.
  3. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  4. Gary R. Saxonhouse & Robert M. Stern, 2003. "The Bubble and the Lost Decade," The World Economy, Wiley Blackwell, vol. 26(3), pages 267-281, 03.
  5. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  6. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April.
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