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INFLATION DYNAMICS AND LABOR MARKET SPECIFICATIONS: A BAYESIAN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH FOR JAPAN'S ECONOMY
Author(s) -
ICHIUE HIBIKI,
KUROZUMI TAKUSHI,
SUNAKAWA TAKEKI
Publication year - 2013
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2011.00428.x
Subject(s) - economics , inflation (cosmology) , new keynesian economics , econometrics , wage , phillips curve , marginal cost , dynamic stochastic general equilibrium , bayesian probability , bayes estimator , macroeconomics , microeconomics , unemployment , monetary policy , labour economics , artificial intelligence , theoretical physics , computer science , physics
Which labor market specification is better able to describe inflation dynamics, a widely used sticky wage model or a recently investigated labor market search model? Using a Bayesian likelihood approach, we estimate these two models with Japan's data. This article shows that the labor market search model is superior to the sticky wage model in terms of both marginal likelihood and out‐of‐sample forecast performance, particularly regarding inflation. The labor market search model is better able to replicate the cross‐correlation among inflation, real wages, and output in the data. Moreover, in this model, real marginal cost is determined by both hiring cost and unit labor cost that varies with employment fluctuations, which gives rise to a high contemporaneous correlation between inflation and real marginal cost as represented in the New Keynesian Phillips curve . ( JEL E24, E32, E37)