Christian Broda (University of Chicago, Graduate School of Business, and National Bureau of Economic Research (E-mail: cbroda@chicagogsb.edu)) David E. Weinstein (Columbia University and National Bureau of Economic Research (E-mail: dew35@columbia.edu))
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Japanese monetary and fiscal policy uses the consumer price index (CPI) as a metric for price stability. Despite a major effort to improve the index, the Japanese methodology of calculating the CPI seems to have a large number of deficiencies. Little attention is paid in Japan to substitution biases and quality upgrading. This implies that important methodological differences have emerged between the United States and Japan since the former started to correct for these biases in 1999. We estimate that using the new corrected U.S. methodology, Japanfs deflation averaged 1.2 percent per year since 1999. This is more than twice the deflation suggested by Japanese national statistics. Ignoring these methodological differences is misleading, because it would suggest that U.S. real per capita consumption growth has been growing at a rate that is almost 2 percentage points higher than that of Japan between 1999 and 2006. When a common methodology is used, Japanfs growth has been much closer to that of the United States over this period. Moreover, we estimate that the bias of the Japanese CPI relative to a true cost-of- living index is around 2 percent per year. This overstatement in the Japanese CPI in combination with Japanfs low inflation rate is likely to cost the government more than \69 trillion?or 14 percent of GDP?over the next 10 years in increased Social Security transfers and debt service. For monetary policy, the overstatement of inflation suggests that if the BOJ adopts a formal inflation target without changing the current CPI methodology, a lower band of less than 1.8 percent would not achieve its goal of price stability.
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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 25 (2007) Issue (Month): S1 (December) Pages: 29-56 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
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