Japanese Economy

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We study a large dataset on Japanese consumer prices with two distinct features: low inflation rates and high frequency of price changes. Overall, the probability of price changes for traded goods tends to be strongly driven by information on past macroeconomic aggregates, rather than on previous price changes. The same conclusion, however, does not necessarily hold for non-traded goods. These results are consistent across different samples and under a variety of robustness checking schemes. A menu costs model is then augmented with capital accumulation and endogenous investment costs to account for these facts. The model performs reasonably well in terms of capturing these salient features of Japanese consumer prices and at the same time keeping up with macroeconomic data along some important dimensions.
Introduction
At the turn of the twenty-first century, Japanese price levels began to alternate between low inflation and deflation. This, however, was not Japan's only problem: it had also been suffering from prolonged stagnation since the 1990s, a problem so extreme that many often refer to this period as the `lost decade.' What is more startling is that, despite many deliberate actions from the Bank of Japan, these problems still persist. Until recently, Japan still holds onto a near zero interest rates policy, which sometimes referred to as an equivalent of the American quantitative easing. Two features of Japanese consumer prices stand out during this period. First, price changes are frequent. Second, price increases are of higher frequency but of lesser magnitude than price decreases, which dovetails nicely with the distinctively low inflation rates (see, e.g., Figure 1).
How does past information on monetary policy and r...

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...cas (2007) that is augmented with capital accumulation and endogenous investment costs to account for these facts. The model performs reasonably well in terms of capturing these salient features of Japanese consumer prices and at the same time keeping up with the macroeconomic aggregates along some important dimensions.
The paper proceeds as follows. Section 2 reviews some key features of the Japanese micro-prices data, along with some stylized facts on the frequency of price changes. Section 3 analyzes the behaviors of the hazard functions for micro-prices under both parametric and non-parametric set-ups. Given these features of the micro prices data, section 4 augments an otherwise standard state-dependent pricing model with capital accumulation and endogenous investment costs. Section 4.3 discusses the model results and possible extensions. Section 5 concludes.

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