Study compares post-pandemic inflation drivers in Japan and U.S.
A Bank of Japan working paper compares post-pandemic inflation dynamics in Japan and the U.S. using a structural vector autoregression model. The study identifies similar cyclical patterns driven by supply, demand, and labor market tightness.
Unpacking inflation's structural drivers
The paper employs a structural vector autoregression (SVAR) model combined with narrative sign restrictions to analyze post-pandemic inflation.
Its findings reveal similar cyclical patterns in Japan and the U.S. Initially, inflation was driven by supply and global shocks, followed by pent-up demand factors.
This ultimately led to inflationary pressures stemming from labor market tightening shocks.
The study emphasizes the non-negligible contributions of labor market tightness to inflation in both countries.
Furthermore, it validates narrative sign restrictions as an informative strategy for identifying structural shocks, a technique previously unapplied to Japanese inflation data.
Debates on supply, demand, and labor
The research addresses key academic debates surrounding post-COVID-19 inflation, particularly whether the run-up was primarily caused by supply or demand factors.
It also examines the varying role of labor market conditions.
While some literature points to demand factors in the U.S. and global supply chain disruptions in the Euro Area, Japan's inflation has been largely influenced by global supply-side factors.
The paper highlights the significant differences in labor market contexts, with Japan experiencing chronic tightness due to demographic changes, contrasting with the dynamic, short-term shifts seen in the U.S. labor market.
Beyond the headlines: Deeper insights
This paper offers a crucial quantitative lens into the structural forces behind post-pandemic inflation, moving beyond anecdotal explanations.
Its application of narrative sign restrictions provides a robust methodology for disentangling complex shock dynamics, particularly the underappreciated role of labor market tightness.
The study's detailed comparison of Japan and the U.S. offers valuable, nuanced insights for policymakers grappling with persistent price pressures.