This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling’s model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
The COVID-19 pandemic has resulted in a resurgence of inflation, which some policymakers and scholars attribute to a surge in firms’ markups.1 The upward trajectory of market oligopoly and markups over the past few decades may have contributed to the inflationary upswing. In contrast, Japan’s inflation has remained low relative to other countries, with firms frequently attributing this phenomenon to the presence of other firms with inflexible pricing policies. These findings underscore the importance of considering strategic price setting in an oligopolistic market, yet macroeconomic analyses in this area are limited due to the predominance of monopolistic competition in macroeconomic models, despite strategic complementarity in price setting being a major source of real rigidity (Romer 2001, Woodford 2003). Furthermore, while markups are increasing, their development is not uniform across firms, and heterogeneity, such as the emergence of superstar firms, cannot be ignored.
WP047
Large-scale household inventory buildups occurred in Japan five times over the last decade, including those triggered by the Tohoku earthquake in 2011, the spread of COVID-19 infections in 2020, and the consumption tax hikes in 2014 and 2019. Each of these episodes was accompanied by considerable swings in GDP, suggesting that fluctuations in household inventories are one of the sources of macroeconomic fluctuations in Japan. In this paper, we focus on changes in household inventories associated with temporary sales and propose a methodology to estimate changes in household inventories at the product level using retail scanner data. We construct a simple model on household stockpiling and derive equations for the relationships between the quantity consumed and the quantity purchased and between consumption and purchase prices. We then use these relationships to make inferences about quantities consumed, consumption prices, and inventories. Next, we test the validity of this methodology by calculating price indices and check whether the intertemporal substitution bias we find in the price indices is consistent with theoretical predictions. We empirically show that there exists a large bias in the Laspeyres, Paasche, and Törnqvist price indices, which is smaller at lower frequencies but non-trivial even at a quarterly frequency and that intertemporal substitution bias disappears for a particular type of price index if we switch from purchase-based data to consumption-based data.
In the first week of March 2020, when the first wave of COVID-19 infections hit Japan, supermarket sales went up more than 20% over the previous year. This was due to hoarding by consumers stemming from an increase in uncertainty regarding the spread of the virus. Similar hoarding occurred during the third wave, which struck Japan in October 2020. Such hoarding has occurred not only during the COVID-19 pandemic but also after the Tohoku earthquake in March 2011 and the subsequent nuclear power plant accident in Fukushima, when residents of Tokyo and other areas that were spared serious damage went on a buying spree for food and other necessities. Consumer hoarding also occurred due to policy shocks: when the consumption tax rate was raised in April 2014 and in October 2019, people hoarded large amounts of goods just before the tax rate was raised, and a prolonged consumption slump occurred thereafter. Each of these episodes was accompanied by considerable swings in GDP, suggesting that fluctuations in household inventories are one of the sources of macroeconomic fluctuations in Japan.
WP033
This paper examines the implications of consumer inventory for cost-of-living indices (COLIs) and business cycles. We begin by providing stylized facts about consumer inventory using scanner data. We then construct a quasi-dynamic model to describe consumers’ purchase, consumption, and inventory behavior. A key feature of our model is that inventory is held by household producers, not by consumers, which enables us to construct a COLI in a static manner even in an economy with storable goods. Based on this model, we show that stockpiling during temporary sales generates a substantial bias, or so-called chain drift, in conventional price indices, which are constructed without paying attention to consumer inventory. However, the chain drift is greatly mitigated in our COLI, which is based on consumption prices (rather than purchase prices) and quantities consumed (rather than quantities purchased). We provide empirical evidence supporting these theoretical predictions. We also show empirically that consumers’ inventory behavior tends to depend on labor market conditions and the interest rate.
Storable goods are abundant in the real world (e.g., pasta, toilet rolls, shampoos, and even vegetables and milk), although most economic models deal with perishable goods for the sake of simplicity. Goods storability implies that purchases (which are often observable) do not necessarily equal consumption (which is often unobservable), and the difference between the two serves as consumer inventory. In particular, temporary sales and the anticipation of an increase in the value-added tax rate often lead to a greater increase in purchases than consumption. Moreover, the COVID-19 outbreak in 2020 caused many products, such as pasta and toilet rolls, to disappear from supermarket shelves, which would not have happened if these products were not storable. The stockpiling behavior by consumers poses challenges for economists, for example in the construction of price indices.
WP025
In this study, we evaluate the effects of product turnover on a welfare-based cost-of-living index. We first present several facts about price and quantity changes over the product cycle employing scanner data for Japan for the years 1988-2013, which cover the deflationary period that started in the mid 1990s. We then develop a new method to decompose price changes at the time of product turnover into those due to the quality effect and those due to the fashion effect (i.e., the higher demand for products that are new). Our main findings are as follows: (i) the price and quantity of a new product tend to be higher than those of its predecessor at its exit from the market, implying that Japanese firms use new products as an opportunity to take back the price decline that occurred during the life of its predecessor under deflation; (ii) a considerable fashion effect exists, while the quality effect is slightly declining; and (iii) the discrepancy between the cost-ofliving index estimated based on our methodology and the price index constructed only from a matched sample is not large. Our study provides a plausible story to explain why Japan’s deflation during the lost decades was mild.
Central banks need to have a reliable measure of inflation when making decisions on monetary policy. Often, it is the consumer price index (CPI) they refer to when pursuing an inflation targeting policy. However, if the CPI entails severe measurement bias, monetary policy aiming to stabilize the CPI inflation rate may well bring about detrimental effects on the economy. One obstacle lies in frequent product turnover; for example, supermarkets in Japan sell hundreds of thousands of products, with new products continuously being created and old ones being discontinued. The CPI does not collect the prices of all these products. Moreover, new products do not necessarily have the same characteristics as their predecessors, so that their prices may not be comparable.
We conduct a discourse analysis of the Bank of Japan’s Monthly Report and examine its characteristics in relation to business cycles. We find that the difference between the number of positive and negative expressions in the reports leads the leading index of the economy by approximately three months, which suggests that the central bank’s reports have some superior information about the state of the economy. Moreover, ambiguous expressions tend to appear more frequently with negative expressions. Using a simple persuasion game, we argue that the use of ambiguity in communication by the central bank can be seen as strategic information revelation when the central bank has an incentive to bias the reports (and hence beliefs in the market) upwards.
Central banks not only implement monetary policy but also provide a significant amount of information for the market (Blinder [2004], Eijffinger and Geraats [2006]). Indeed, most publications of central banks are not solely about monetary policy but provide data and analyses on the state of the economy. It has been widely recognized that central banks use various communication channels to influence market expectations so as to enhance the effectiveness of their monetary policy. Meanwhile, it is not readily obvious whether central banks reveal all information they have exactly as it stands. In particular, although central banks cannot make untruthful statements owing to accountability and fiduciary requirements, they may communicate strategically and can be selective about the types of information they disclose. This concern takes on special importance when central banks’ objectives (e.g., keeping inflation/deflation under control and achieving maximum employment) may not be aligned completely with those of market participants, and possibly, governments.
In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. While a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. The model calibrated to the U.S. economy suggests that the adverse effect dominates in the long run.
The Great Recession during 2007–09 prompted many central banks to conduct unprecedented levels of monetary easing. Although this helped in preventing an economic catastrophe such as the Great Depression, many economies have experienced only slow and modest recoveries (i.e., they faced secular stagnation) since then. Japan has fallen into even longer stagnations, namely the lost decades. Firm entry and productive investment have been inactive since the burst of the asset market bubble around 1990 despite a series of monetary easing measures (Caballero et al. (2008)).
Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the paper, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation between the two. We then construct a dynamic stochastic general equilibrium model that takes households’ decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan’s lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.
Standard New Keynesian models have often neglected temporary sales, although the frequency of sales is far higher than that of regular price changes, and hence it is not necessarily guaranteed that the assumption of sticky prices holds. Ignoring this fact is justified, however, if retailers’ decision to hold sales is independent of macroeconomic developments. If this is the case, temporary sales do not eliminate the real effect of monetary policy. In fact, Guimaraes and Sheedy (2011, hereafter GS) develop a dynamic stochastic general equilibrium (DSGE) model incorporating sales and show that the real effect of monetary policy remains largely unchanged. Empirical studies such as Kehoe and Midrigan (2010), Eichenbaum, Jaimovich, and Rebelo (2011), and Anderson et al. (2012) argue that retailers’ decision to hold a sale is actually orthogonal to changes in macroeconomic developments.
This paper considers the macroeconomic effects of retailers’ market concentration and buyer-size discounts on inflation dynamics. During Japan's “lost decades,” large retailers enhanced their market power, leading to increased exploitation of buyer-size discounts in procuring goods. We incorporate this effect into an otherwise standard New-Keynesian model. Calibrating to the Japanese economy during the lost decades, we find that despite a reduction in procurement cost, strengthened buyer-size discounts did not cause deflation; rather, they caused inflation of 0.1% annually. This arose from an increase in the real wage due to the expansion of production.
In this paper, we aim to consider the macroeconomic effects of buyer-size discounts on inflation dynamics. It is the conventional wisdom that large buyers (downstream firms) are better bargainers than small buyers in procuring goods from sellers (upstream firms). Retailers, wholesalers, and manufacturers negotiate prices, taking account of trade size. The increase in sales of retail giants such as Wal-Mart in the United States, Tesco in the United Kingdom, and Aeon in Japan has been accompanied by the increase in their bargaining power over wholesalers and manufacturers. Figure 1 shows evidence that larger buyers enjoy larger price discounts in Japan. In 2007, the National Survey of Prices by the Statistics Bureau reported the prices of the same types of goods sold by retailers with differing floor space. For nine kinds of goods, from perishables to durable goods, retail prices decrease with the floor space of retailers. This suggests that large retailers purchase goods from wholesalers and manufacturers at lower prices than small retailers do. It is natural to think that these buyer-size discounts influence macro inflation dynamics.
We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the U.S. scanner data. Second, regular prices are almost as flexible as those in the U.S. and Euro area. Third, heterogeneity is large. Fourth, during Japan’s lost decades, temporary sales played an increasingly important role. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment like the indicators of labor market.
Since the asset price bubble went bust in the early 1990s, Japan has gone through prolonged stagnation and very low rates of inflation (see Figure 1). To investigate its background, in this paper, we study micro price dynamics at a retail shop and product level. In doing so, we use daily scanner or Point of Sales (POS) data from 1988 to 2013 covering over 6 billion records. From the data, we examine how firms’ price setting changed over these twenty years; report similarities and differences in micro price dynamics between Japan and foreign countries; and draw implications for economic theory as well as policy.
