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Understanding Output and Price Dynamics in Japan: Why Have Japan's Price Movements Been Relatively Stable Since the 1990s?

  • Masahiko Shibamoto

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

  • Ryuzo Miyao

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

Since the beginning of the 1990s, Japanese inflation has been relatively stable with slight declines, while output has remained volatile with a prolonged stagnation. This paper attempts to explore possible explanations for these macroeconomic facts based on the aggregate demand and supply framework. Specifically, applying a vector autoregressive framework that allows for correlations between structural disturbances, it examines two broad questions in a unified way: (i) whether the slope of the short-run aggregate supply curve became significantly flattened and/or (ii) whether structural demand and supply shocks are more strongly positive correlated. Our results suggest that positive correlation between structural demand and supply shocks has become stronger since the 1990s, while there is less evidence that the short-run aggregate supply curve has been flattened. We argue that shifts in aggregate demand and supply curves in the same direction lead to larger, permanent effects on output and to limited effects on prices in Japan.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp219.pdf
File Function: First version, 2008
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 219.

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Length: 25 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:kob:dpaper:219
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