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Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan

  • Muto, Ichiro

We estimate a New Keynesian Phillips curve (NKPC) in Japan, focusing on the measurement of real marginal cost (RMC). Especially, we correct labor share by taking account of two kinds of labor market frictions: (i) labor adjustment costs and (ii) real wage rigidity. Our results show that the consideration of these labor market frictions greatly improves the fit of Japan's NKPC. Furthermore, if we additionally incorporate materials prices in the calculation of RMC, then the fit of the NKPC is further improved. Our most important finding is that the conventional backward-looking component is no more needed to explain Japan's inflation dynamics if we use a corrected measure of RMC.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4662.

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Date of creation: Jul 2007
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Handle: RePEc:pra:mprapa:4662
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