Inflation dynamics and labor market specifications: A bayesian dynamic stochastic general equilibrium approach for japan's economy

Hibiki Ichiue, Takushi Kurozumi, Takeki Sunakawa

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

Abstract

Which labor market specification is better able to describe inflation dynamics, a widely used sticky wage model or a recently investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan's data. This article shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out-of-sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross-correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve.

Original languageEnglish
Pages (from-to)273-287
Number of pages15
JournalEconomic Inquiry
Volume51
Issue number1
DOIs
Publication statusPublished - 2013 Jan
Externally publishedYes

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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