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Hidden Stagflation

Author

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  • Takahashi, Yuta
  • Takayama, Naoki

Abstract

We present evidence that the rise in inflation in Japan since 2014 is a result of a hidden stagflation: the relative prices of durable consumption and ICT investment goods stopped declining, reflecting technology stagnation and exerting an inflationary pressure on the economy and; the real side of the Japanese economy simultaneously started stagnating even further. We construct a multi-good monetary model to account for these facts together and quantify the impact of the technology stagnation on the aggregate inflation rate. We develop a new sign restriction approach to construct informative lower bounds to the impact of the technology stagnation on long-run inflation without relying on the exact Euler equation and some of the balanced growth path properties. By using the lower bounds, we find that inflation would be close to 0% or even negative without the technology stagnation. Moreover, the technology stagnation explains a sizable fraction of the observed slowdown in the real GDP and consumption growth. Our findings challenge the conventional view that Japan emerged from long-lasting deflation owing to the unconventional monetary policies. Finally, we apply our analysis to European countries and uncover the hidden stagflation there as well.

Suggested Citation

  • Takahashi, Yuta & Takayama, Naoki, 2022. "Hidden Stagflation," Discussion Paper Series 733, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:733
    Note: July 4, 2022
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/74207/DP733.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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