Dual Labor Market, Inflation, and Aggregate Demand in an Agent-Based Model of the Japanese Macroeconomy

51 Pages Posted: 18 Feb 2020

See all articles by Corrado Di Guilmi

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies

Date Written: February 6, 2020

Abstract

This paper presents a stock-flow-consistent agent-based model calibrated on Japanese data. The goal is to investigate the effects on the joint dynamics aggregate demand and price of the use by Japanese firms of secondary employees (temporary, part-time, or agency). Empirical evidence point to financial distress and market uncertainty as factors affecting firms’ hiring decisions, but their connections with inflation and its sensitivity to employment and output are still under-investigated. In particular, the hiring of secondary workers with lower wages can result in sluggish inflation even during boom periods. The paper aims to provide three main contributions. The first is to identify and test a possible cause of deflation, which is related to firm-level financial distress and uncertain business environment. The study of firms’ hiring policies can also shed light on the modifications in the relationship between wage and employment dynamics testified by the flattening of the Phillips curve. The second contribution is the analysis of a range of possible countervailing policies, alternative or complementary to the conventional interest rate policy pursued by the monetary authority. Finally, the paper contributes to the recent developments in the estimation of agent-based models by presenting an original technique, which relies on the identification and optimization of meta-models. The numerical results of the model are quantitatively comparable to the main features of the Japanese economy in the last twenty years. The flattening of the Phillips curve appears to be mostly due to the use of secondary employment as a buffer to reduce financial distress in an uncertain business climate. In terms of policy indications, a strong indexation of minimum wage emerges as the most effective policy to increase inflation. The sensitivity analysis also sheds light on possible reasons why monetary policy may have uncertain effects on inflation.

Suggested Citation

Di Guilmi, Corrado and Fujiwara, Yoshi, Dual Labor Market, Inflation, and Aggregate Demand in an Agent-Based Model of the Japanese Macroeconomy (February 6, 2020). CAMA Working Paper No. 11/2020, Available at SSRN: https://ssrn.com/abstract=3537948 or http://dx.doi.org/10.2139/ssrn.3537948

Corrado Di Guilmi (Contact Author)

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

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

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