Understanding Post-Pandemic Inflation in Japan and the U.S.: A Narrative Sign Restriction Approach

Following the COVID-19 pandemic, the surge in inflation which defined its aftermath created a heightened interest amongst academics and policy makers to identify the structural factors of inflation dynamics. Against this backdrop, this paper uses a structural vector autoregression (SVAR) with narrative sign restrictions to characterize how the inflation episode of the COVID-19 pandemic compared across Japan and the U.S. The findings are threefold: (1) Japan and the U.S. share similar cyclical patterns in the sense that the initial inflation run-up was driven by supply and global shocks, followed by pent-up demand factors, which ultimately led to inflationary pressures from labor market tightening shocks, (2) labor market tightness shows the non-negligible contributions on inflation for both countries, and (3) narrative sign restrictions are informative as a strategy for the identification of structural shocks.