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    Imperfect information, shock heterogeneity, and inflation dynamics

    Okuday, T. and Tsurugaz, T. and Zanetti, F. (2019) Imperfect information, shock heterogeneity, and inflation dynamics. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    We establish novel empirical regularities on firms' expectations about aggregate and idiosyncratic components of sectoral demand using industry-level survey data for the universe of Japanese rfims. Expectations of the idiosyncratic component of demand differ across sectors, and they positively co-move with expectations about the aggregate component of demand. To study the implications for in ation, we develop a model with firms that form expectations based on the inference of distinct shocks from a common signal. We show that the sensitivity of in ation to changes in demand decreases with the volatility of idiosyncratic component of demand that proxies the degree of shock heterogeneity. We apply principal component analysis on Japanese sectoral-level data to estimate the degree of shock heterogeneity, and we establish that the observed increase in shock heterogeneity plays a significant role for the reduced sensitivity of in ation to movements in real activity since the late 1990s.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BCAM Working Paper Series 1906. ISSN 1745-8587
    Keyword(s) / Subject(s): Imperfect information, Shock heterogeneity, In ation dynamics.
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 12 Sep 2019 13:50
    Last Modified: 13 Sep 2019 05:21
    URI: http://eprints.bbk.ac.uk/id/eprint/28916

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