Deflation/Inflation Dynamics: Analysis Based on Micro Prices

60 Pages Posted: 16 Feb 2015 Last revised: 17 Feb 2015

See all articles by Hiroshi Yoshikawa

Hiroshi Yoshikawa

University of Tokyo - Faculty of Economics

Hideaki Aoyama

GSAIS, Kyoto University

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies

Hiroshi Iyetomi

Niigata University

Date Written: February 15, 2015

Abstract

Micro price data shows that individual price settings are not time-invariant as presumed in the existing literature. Furthermore, the analysis of auto-correlations shows that interactions of micro prices with leads and lags ignored in the literature play a very important role in explaining the behavior of aggregate price index. The price index such as CPI contains "noises" for the purpose of macroeconomics and monetary policy. The "core" CPI used by central banks is, however, defined merely on common sense and casual observation. We present a new method of extracting information on the systemic changes of the aggregate price based on micro price data. The "true core price index" so defined is correlated with over-time hours worked, the unemployment rate, and the exchange rate. It is not significantly correlated with money supply. Our analysis also shows that inertia arising from interactions of micro prices more plausibly explains the behavior of aggregate price than expectations.

Keywords: CPI, sticky prices, Hilbert transformation, CPCA

JEL Classification: E31, D12, C40

Suggested Citation

Yoshikawa, Hiroshi and Aoyama, Hideaki and Fujiwara, Yoshi and Iyetomi, Hiroshi, Deflation/Inflation Dynamics: Analysis Based on Micro Prices (February 15, 2015). Available at SSRN: https://ssrn.com/abstract=2565599 or http://dx.doi.org/10.2139/ssrn.2565599

Hiroshi Yoshikawa

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Hideaki Aoyama (Contact Author)

GSAIS, Kyoto University ( email )

Yoshida-Adachi-cho 1
Sakyo-ku
Kyoto, 606-8306
Japan
+81-9019011954 (Phone)

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies ( email )

7-1-28 Minato-jima, Minami-machi
Chuo-ku
Kobe, Hyogo 650-0047
Japan

Hiroshi Iyetomi

Niigata University ( email )

8050 Ikarashi-2-cho
Nishi-ku
Niigata, 9502181
Japan

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