Empirical Evidence for Collective Motion of Prices with Macroeconomic Indicators in Japan

Abstract

We apply a complex Hilbert principal component analysis (CHPCA) to a set of Japanese economic data collected over the last 32 years, comprising individual price indices of middle classification level (imported goods, producer goods, consumption goods and services), Indices of Business Conditions (leading, coincident, lagging), Yen-Dollar Exchange Rate, Monetary Stock, and Monetary Base. The CHPCA gives a new insight into dynamical linkage of price movements with business cycles and financial conditions. A statistical test identifies two significant eigenmodes with the largest and second largest eigenvalues. The lead-lag relations among domestic prices in the two modes are quite similar, indicating the individual prices behave in a collective way. However, the collective motion of prices is driven differently, that is, by the exchange rate at the upper stream side in the first mode and domestic demand at the lower stream side in the second mode. In contrast, the monetary variables play no important role in the two modes.

Keywords: price changes, business cycles, exchange rate, Hilbert transformation, principal component analysis, dynamical linkage

JEL Classification: E31, D12, C40