The Hybrid New Keynesian Phillips Curve and the Expected Inflation in Japan

This paper examines inflation dynamics in recent Japan utilizing the estimation of the hybrid New Keynesian Phillips Curve. The result of the estimation with the observed inflation rate and the one with the expected inflation rate estimated through the Kanoh (2006)-type modified Carlson-Parkin procedure are examined. In addition, the underlying points in dispute including the validity of the pure forward-looking (non-hybrid) NKPC are considered. The result of our empirical study leads us to the following conclusions. First, the forward-looking term seems a certain effective element to the inflation dynamics. Second, it is apparent that the backward-looking element has the unignorable impact on inflation process. Third, our results imply the incompleteness of the pure forward-looking NKPC that focuses only on expected future inflation. Fourth, the estimated flattening of the NKPC suggests that the today’s difficulty in conducting monetary policy by the central bank.