Relative-Price Changes and Demand Factors in the Period of Quantitative Easing in Japan

29 Pages Posted: 3 Feb 2014

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Hiroyuki Ono

Toyo University - Faculty of Economics

Date Written: August 13, 2010

Abstract

Concentrating on the period of quantitative easing in Japan, this paper reexamines the correlation between the asymmetry of sectoral relative-price changes and the aggregate inflation rate. This correlation is widely interpreted as evidence that short-run inflation is determined by supply-side factors; however, we study whether, in addition to the inflation rate, monetary environment and aggregate demand explain this correlation. Using producer price index data, we show, first, that the positive and significant effect of relative-price change asymmetries on inflation is not robust with respect to various indicators of asymmetry. Second, indicators of aggregate demand and monetary environment affect the measures of asymmetries, which raises doubt about whether they can be interpreted as pure supply-side indicators. Third, in addition to the indirect effect via measures of asymmetries, demand and monetary factors directly affect inflation. Thus, we reject the claim that the recent disinflation/deflation period can be understood as primarily a supply-side phenomenon.

Keywords: Japan, supply side, inflation, deflation, price-change asymmetries, quantitative easing

JEL Classification: E20, E31, E52, E65, O53

Suggested Citation

Hayo, Bernd and Ono, Hiroyuki, Relative-Price Changes and Demand Factors in the Period of Quantitative Easing in Japan (August 13, 2010). Available at SSRN: https://ssrn.com/abstract=2389598 or http://dx.doi.org/10.2139/ssrn.2389598

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Hiroyuki Ono

Toyo University - Faculty of Economics ( email )

5-28-20 Hakusan
Bunkyo-ku
Tokyo 112-8606
Japan

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