Imperfect Information, Heterogeneous Demand Shocks, and Inflation Dynamics
Okuda, T. and Tsuruga, T. and Zanetti, F. (2021) Imperfect Information, Heterogeneous Demand Shocks, and Inflation Dynamics. Working Paper. Birkbeck Centre for Applied Macroeconomics, London, UK.
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Abstract
Using sector-level survey data for the universe of Japanese firms, we establish the positive co-movement in the firm’s expectations about aggregate and sector-specific demand shocks. We show that a simple model with imperfect information on the current aggregate and sector-specific components of demand explains the positive co-movement of expectations in the data. The model predicts that an increase in the relative volatility of sector-specific demand shocks compared to aggregate demand shocks reduces the sensitivity of inflation to changes in aggregate demand. We test and corroborate the theoretical prediction on Japanese data and find that the observed decrease in the relative volatility of sector-specific demand has played a significant role for the decline in the sensitivity of inflation to movements in aggregate demand from mid-1980s to mid-2000s.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | BCAM Working Paper #2104. ISSN: 1745-8587 |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Research Centres and Institutes: | Applied Macroeconomics, Birkbeck Centre for |
| Depositing User: | Isobel Edwards |
| Date Deposited: | 29 Mar 2021 15:37 |
| Last Modified: | 02 Aug 2023 18:08 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/43231 |
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