Advances in Economics and Business Vol. 5(10), pp. 556 - 567
DOI: 10.13189/aeb.2017.051004
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The Modified Phillips Curve as a Possible Answer to Japanese Deflation


Noriko Ashiya *
Faculty of Real Estate, Meikai University, Japan

ABSTRACT

A modified Phillips curve is useful to explain the contradictory findings sometimes arising from conventional Phillips curve estimation. In this paper, we estimate the inflation-unemployment and real wage inflation-unemployment dynamics for both Japan and the United States using data between 1972:Q1 and 2014:Q4. We divide this into two roughly equally sized sub-periods, 1972:Q1-1991:Q4 and 1992:Q1-2014:Q4. The first sub-period tracks the Japanese economic boom prior to the bursting of the bubble economy; the second continues to reflect the long recessionary period in Japan that followed. The modified Phillips curve serving as the aggregate supply (AS) curve with a quantity equation with zero velocity as the aggregate demand (AD) curve in an AS-AD framework, reveals that much of the slowdown in Japanese inflation was due to the lack of the postwar acceleration of "productivity-based" real wage inflation, a feature unexplained within a traditional demand-oriented approach. Some of the efficacy of the productivity-based real wage acceleration that we identified is related to the use of this simpler formulation of the AD curve, which even though it has an inherent analytical bias in supporting the role of monetary policy, it is permissible when focus lies on the decisions of suppliers.

KEYWORDS
Phillips Curve, AS−AD Analysis, Monetary Policy, Deflation

Cite this paper
Noriko Ashiya . "The Modified Phillips Curve as a Possible Answer to Japanese Deflation." Advances in Economics and Business 5.10 (2017) 556 - 567. doi: 10.13189/aeb.2017.051004.