Research

Emergence from the prolonged deflation in Japan is often attributed to an unconventional monetary policy known as QQE. This purported positive news is accompanied by the negative news that consumption growth started stagnating simultaneously. These ambivalent facts pose a conundrum, and we propose a resolution to it. The key to understanding the conundrum is the fact that the growth of technological progress specific to manufacturing goods has stagnated and that Japan is constrained at an effective lower bound of nominal interest rates. The decline in real interest rate caused by the technological stagnation and the lower bound creates inflationary pressure on manufacturing goods. Using an extended New-Keynesian model, we quantify the impact of this technological stagnation on aggregate inflation and consumption growth. We find that the technology stagnation alone can account for more than half of the observed rise in inflation in Japan and about 40% of the decline in consumption growth. We conclude that the conundrum reflects this hidden stagflation induced by the technology stagnation of manufacturing good.

We investigate the role of technology on the global stagnation of average labor productivity (ALP). In the last decade, equipment-specific technological progress has stagnated significantly across developed countries, reflected in the movement of the relative equipment prices. Using a multi-capital growth model, we quantify the impact of the equipment-specific technological stagnation on the ALP growth rates. Our analysis shows that the technological stagnation alone accounts for around 60% of the declines in the US ALP and a bulk fraction of other developed countries. We discuss several possible causes behind the global equipment-specific technological stagnation.

We derive the restrictions on monetary policy which guarantee that inflation expectations are anchored (in the sense of rationalizability) in a simple monetary model. The restrictions are stronger than what is required for a globally unique rational expectations equilibrium. Loosely, the restrictions are captured by the idea that policy should ‘lean against the wind, but not too aggressively’.

During WWI, the Japanese economy experienced a rapid increase in inflation. Then Japan experienced successive big deflation. The nominal wage rate increased during WWI but was completely stuck after WWI. We study the cotton spinning industry with high-quality data and provide a micro-founded model.