22nd Annual NBER-TCER-CEPR Conference

December 17-18, 2008
Jordi Gali, Takeo Hoshi, Anil Kashyap, and Tsutomu Watanabe, Organizers

Chihiro Shimizu, Reitaku University; Kiyohiko Nishimura, Former Professor of Economics, University of Tokyo, and Tsutomu Watanabe, Hitotsubashi University and TCER
Residential Rents and Price Rigidity: Micro Structure and Macro Consequences

Why did the Japanese consumer price index for rents remain so stable even during the Japanese housing bubble in the 1980s? To address this question, Shimizu, Nishimura, and Watanabe begin with an analysis of microeconomic rigidity and then investigate its implications for aggregate price dynamics. They find that 90 percent of the units in their dataset did not change rents each year, which indicates that rent stickiness was three times as high in Japan as in the United States. They also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level. Rent adjustments appear to be state dependent, not time dependent. These two results together indicate that both the intensive and extensive margins of rent adjustments are very small, yielding only a slow response of the CPI to aggregate shocks. The authors show that the CPI inflation rate would have been 1 percentage point higher during the bubble period, and more than 1 percentage point lower during the bubble bursting period, if Japanese housing rents were as flexible as those in the United States.

Kenn Ariga, Kyoto University, and Ryo Kambayashi, Hitotsubashi University
Employment and Wage Adjustments at Firms under Distress in Japan: An Analysis Based upon a Survey

Ariga and Kambayashi use the results of a survey of Japanese manufacturing and service firms to investigate the choice of wage-and-employment adjustments needed to substantially reduce total labor costs. Their analysis indicates that large reductions require layoffs of core employees. If firms do not feel immediate pressure from the external labor market or strong competition in the product market, then cuts in base wages are more likely. In Japan the association between wage flexibility and competitiveness in the labor or product market seems unwarranted. The authors also find some evidence that concerns over adverse selection or the demoralizing effects of wage cuts and layoffs are real.

Fabio Canova, ICREA-UPF, and Tobias Menz, University of Bern
Does Money have a Role in Shaping Domestic Business Cycles? An International Investigation

Canova and Menz study the contribution of money to business cycle fluctuations in the United States, the United Kingdom, Japan, and the Euro area. They find that real balances are statistically important for output and inflation fluctuations in all countries except Japan, and the contribution of those fluctuations only changes over time in the United Kingdom. Models that give money no role result in a distorted representation of the sources of cyclical fluctuations, of the transmission of policy shocks, and more generally of the events of the last forty years.

Morten Ravn, European University Institute and CEPR; Stephanie Schmitt-Grohe, Columbia University and NBER; Martin Uribe, Columbia University and NBER, and Lenno Uuskula, European University Institute
Deep Habits and the Dynamic Effects of Monetary Policy Shocks

Ravn, Schmitt-Grohe, Uribe, and Uuskula introduce deep habits into a sticky-price sticky-wage economy and then ask whether the countercyclical markup movements induced by those habits helps to explain the dynamic effects of monetary policy shocks. They find that this is the case: when allowing for deep habits, their model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, their model can account both for the price puzzle and for inflation persistence. The authors also show that the deep habits mechanism and nominal rigidities are complementary: the deep habits model can account for the dynamic effects of monetary policy shocks at low to moderate levels of nominal rigidities; the results are stable over time, and they are not caused by monetary policy changes.

Naohito Abe, Hitotsubashi University; and Daiji Kawaguchi, Hitotsubashi University
Incumbent’s Price Response to New Entry: The Case of Japanese Supermarkets

Large-scale supermarkets have expanded rapidly in Japan over the past two decades, partly because of zoning deregulation for large-scale merchants. Abe and Kawaguchi examine the effect of supermarket openings on the price of national brand products sold at local incumbent markets, using scanner price data. Detailed geographic information on store location enables them to define treatment and control groups in order to control for unobserved heterogeneity and temporary demand shocks. Their analysis reveals that in response to a large-scale supermarket opening, the stores in the treatment group lowered their prices of curry paste, bottled tea, instant noodles, detergent, and toothpaste by 1 to 2 percent more than stores in a control group. The price response is larger when the pre-entry market condition is more monopolistic and for stores with similar floor size to the new entrants.

Oleksiy Kryvtsov, Bank of Canada; Virgiliu Midrigan, New York University and NBER
Inventories and Real Rigidities in New Keynesian Business Cycle Models

Kryvtsov and Midrigan here extend an earlier analysis they did of the behavior of inventories in an economy with menu costs, fixed ordering costs, and the possibility of stock-outs. This new work involves a richer setting that is capable of more closely accounting for the dynamics of the U.S. business cycle. The authors find that their original conclusion survives in this setting: in order to explain the countercyclicality of the inventory-to-sales ratio in the data, their model requires an elasticity of real marginal cost to output that approximately equals the inverse intertemporal elasticity of substitution in consumption.

Kevin Clinton, Consultant; Marianne Johnson, Bank of Canada; Ondra Kamenik, International Monetary Fund, and Douglas Laxton, International Monetary Fund
Deflation Risks Under Alternative Monetary Policy Rules

Using a version of the Global Projection Model, Clinton, Johnson, Kamenik, and Laxton describe a set of projections designed to assess how alternative strategic options for monetary policy might affect the looming risk of an international deflation problem. A zero floor for interest rates constrains monetary policy. Confidence intervals, derived from stochastic simulations, indicate the ranges of uncertainty. Their results suggest a high probability of a declining price level for a couple of quarters in 2009 under any monetary policy. Suitable policy rules, however, can greatly reduce the risk that this might lead to a deflation problem. Recovery is generally faster if the policy rule contains an element of price level path targeting.

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