Inflation Dynamics and Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach for Japan's Economy

15 Pages Posted: 30 Nov 2012

See all articles by Hibiki Ichiue

Hibiki Ichiue

affiliation not provided to SSRN

Takushi Kurozumi

Bank of Japan

Takeki Sunakawa

affiliation not provided to SSRN

Date Written: January 2013

Abstract

Which labor market specification is better able to describe inflation dynamics, a widely used sticky wage model or a recently investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan's data. This article shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out‐of‐sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross‐correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.

JEL Classification: E24, E32, E37

Suggested Citation

Ichiue, Hibiki and Kurozumi, Takushi and Sunakawa, Takeki, Inflation Dynamics and Labor Market Specifications: A Bayesian Dynamic Stochastic General Equilibrium Approach for Japan's Economy (January 2013). Economic Inquiry, Vol. 51, Issue 1, pp. 273-287, 2013, Available at SSRN: https://ssrn.com/abstract=2182979 or http://dx.doi.org/10.1111/j.1465-7295.2011.00428.x

Hibiki Ichiue

affiliation not provided to SSRN ( email )

Takushi Kurozumi

Bank of Japan ( email )

2-1-1 Hongoku-cho
Nihonbashi
Chuo-ku Tokyo 103-8660
Japan

Takeki Sunakawa

affiliation not provided to SSRN

No Address Available

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