Testing the Stickiness of Macroeconomic Indicators and Disaggregated Prices in Japan: A FAVAR Approach

This paper compares the stickiness of macroeconomic indicators and disaggregated prices in Japan using a factor-augmented vector autoregressive (FAVAR) approach. We present three main findings. First, fluctuations in common components are the main source of the volatility in disaggregated inflation rates, and generate most of the fluctuations in aggregate inflation. Second, disaggregated prices appear sticky in response to macroeconomic disturbances, but flexible in response to sector-specific shocks. Third, unexpected tight monetary policy shocks have a gradual negative effect on producer prices; however, only a minor effect was observed on consumer prices.