Interindustry Linkages of Prices: Analysis of Japan's Deflation
35 Pages Posted: 16 Feb 2018 Last revised: 22 Feb 2018
Date Written: February 6, 2018
Interactions of micro prices with leads and lags play significant role in explaining the behavior of aggregate price index. We present a new method of exploring the nature of such interactions of micro prices. For Japan's data, we identify two macro shocks, one external and the other domestic, to drive dynamics of prices, but find that irrespective of the sources of shocks, there exists robust flow of changes of domestic prices from upstream to downstream. Prices change in clusters. We identify such clusters. Our analysis suggests that inertia arising from input/output linkages in production explains the behavior of aggregate prices.
Keywords: CPI, Sticky Prices, Interindustry Linkages, Cluster, PCA
JEL Classification: E31, E32, C40
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