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    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: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Isobel Edwards
    Date Deposited: 29 Mar 2021 15:37
    Last Modified: 14 Jun 2021 18:28
    URI: https://eprints.bbk.ac.uk/id/eprint/43231

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