Sectoral Inflation Persistence, Market Concentration, and Imperfect Common Knowledge

ISER DP No. 1082, Revised August 2021. First submitted March 2020.

42 Pages Posted: 21 Apr 2020 Last revised: 16 Aug 2021

See all articles by Ryo Kato

Ryo Kato

Asia University; TCER

Tatsushi Okuda

Bank of Japan - Research and Statistics Department

Takayuki Tsuruga

Osaka University, Institute of Social and Economic Research

Date Written: August 6, 2021

Abstract

Previous studies have stressed that inflation dynamics exhibit substantial dispersion across sectors. Using US producer price data, we present evidence that sectoral inflation persistence is negatively correlated with market concentration, which is difficult to reconcile with the prediction of the standard model of monopolistic competition. To better explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, pricing complementarity among firms increases as market concentration decreases. Because higher pricing complementarity generates greater inflation persistence, our model successfully replicates the observed negative correlation between inflation persistence and market concentration across sectors.

Keywords: Imperfect Common Knowledge, Inflation Persistence, Market Concentration

JEL Classification: E31, D40, L16

Suggested Citation

Kato, Ryo and Okuda, Tatsushi and Tsuruga, Takayuki, Sectoral Inflation Persistence, Market Concentration, and Imperfect Common Knowledge (August 6, 2021). ISER DP No. 1082, Revised August 2021. First submitted March 2020., Available at SSRN: https://ssrn.com/abstract=3562060 or http://dx.doi.org/10.2139/ssrn.3562060

Ryo Kato

Asia University ( email )

5-8 Sakai, Musashisno
Tokyo, 1808629
Japan

TCER ( email )

Sankyo Building
Room 703, Main Building
Chiyoda-ku, Tokyo, 1-7-10
Japan

Tatsushi Okuda

Bank of Japan - Research and Statistics Department ( email )

2-1-1 Hongoku-cho
Nihonbashi
Chuo-ku Tokyo 103-8660
Japan

Takayuki Tsuruga (Contact Author)

Osaka University, Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, 567-0047
Japan

HOME PAGE: http://www.iser.osaka-u.ac.jp/~tsuruga/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
220
PlumX Metrics