Munich Personal RePEc Archive

Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan

Muto, Ichiro (2007): Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan.

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Abstract

We estimate a New Keynesian Phillips curve (NKPC) in Japan, focusing on the measurement of real marginal cost (RMC). Especially, we correct labor share by taking account of two kinds of labor market frictions: (i) labor adjustment costs and (ii) real wage rigidity. Our results show that the consideration of these labor market frictions greatly improves the fit of Japan's NKPC. Furthermore, if we additionally incorporate materials prices in the calculation of RMC, then the fit of the NKPC is further improved. Our most important finding is that the conventional backward-looking component is no more needed to explain Japan's inflation dynamics if we use a corrected measure of RMC.

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