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How does inflation expectation explain the undershooting of inflation target in Japan?: Time-series analysis within the frame of hybrid Philips curve model
Jönköping University, Jönköping International Business School, JIBS, Economics.
Jönköping University, Jönköping International Business School, JIBS, Economics.
2019 (English)Independent thesis Basic level (degree of Bachelor), 180 HE creditsStudent thesis
Abstract [en]

Inflation target was introduced in 2013 in Japan. The goal was to maintain price stability and sustainable inflation rate that is conducive to optimal consumption and investment decisions. However, Japanese inflation rate has been consistently below the target rate. We want to examine why the failure happens in such a big economy. This thesis focuses on inflation expectation as the main factor that leads to unanchored inflation. Inflation expectation can be distinguished into adaptive and rational expectation. To analyse inflation expectation, we regress inflation on four relevant variables: forecasted inflation, lagged inflation, economic slack and import inflation. Our goal is to identify the significance of forecasted inflation and lagged inflation, which are the main variables, to determine the characteristics of the two types of inflation expectation. This time-series analysis is on a monthly basis covering the period between 2013 and 2018. The results show that agents are near-rational rather than rational, meaning that they tend to overweigh the costs of inflation. Also, it is shown that they have minor but significant backward-looking tendency and believe that past inflation determines the current inflation. Hence, inflation expectation could give some useful insights into unanchored inflation.

Place, publisher, year, edition, pages
2019. , p. 35
Keywords [en]
Inflation target, Inflation expectation, rational expectation, adaptive expectation, Quantitative Easing (QE), Japan, Bank of Japan (BOJ)
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-44199ISRN: JU-IHH-NAA-1-20190155OAI: oai:DiVA.org:hj-44199DiVA, id: diva2:1321523
Subject / course
JIBS, Economics
Presentation
2019-05-27, B3051, Jönköping International Business School, Jönköping, 15:40 (English)
Supervisors
Examiners
Available from: 2019-06-24 Created: 2019-06-08 Last updated: 2019-06-24Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf