The Estimation of the New Keynesian Phillips Curve in Japan and Its Implication for the Inflation Response to a Monetary Policy Shock

The New Keynesian Phillips Curve (NKPC) is a key building block in many modern macroeconomic models. This study assesses the empirical fit of the NKPC in Japan by estimating a variety of its specifications. Some empirical results suggest that introducing nominal interest rates into the pure forward-looking NKPC, which implies the existence of a cost channel for monetary policy, helps improve their ability to explain Japanese inflation dynamics. In addition to the existence of the cost channel for monetary policy, these results show that the use of labor share (real unit labor costs) is an important factor in estimating the NKPC. As an implication of these findings, this study proposes that, in the context of the New Keynesian economics, both the existence of the cost channel for monetary policy and the sluggish adjustment of real unit labor costs can account for the fact that there is a long time lag between a monetary policy shock and its impact on inflation.