Empirical modeling of Japan's markup and inflation, 1976-2000

This paper aims to pursue an empirical model of Japan's markup and inflation using historical time series data covering the last quarter of the 20th century. A multivariate cointegration analysis of Japan's macroeconomic data indicates the existence of a long-run economic linkage, which is interpreted as an empirical representation of countercyclical markup. A set of variables in the cointegrated system, apart from markup and inflation, are judged to be weakly exogenous for parameters of interest, thereby allowing us to estimate a partial model given these exogenous variables. The model reduction is then conducted so as to achieve a parsimonious representation of countercyclical markup and inflation dynamics over the sample period of interest.