Friday, September 5, 2014

Update on Japanese inflation

Here area couple more points to add to the graph from this post; we're still above the predicted price level but it seems right on for averaging 0% inflation and the VAT increase is looking more and more like a temporary jump:


I'd like to emphasize that the model fit stops in 2013 -- data from before 2013 were used to fix the parameters of the model, and the subsequent results are "out of sample" (but given the latest NGDP and monetary base/currency numbers).

The result is hovering at the bleeding edge of the error band and there are several possibilities for the discrepancy. One is that there will be upward revisions in NGDP (or downward revisions in the price level. Another possibility is that the data is experiencing another of its occasional excursions from the model (that might be based on human behavior, for example). If we zoom out a bit, we can see the last period like this in 2008:


How about if we concentrate on the trend alone? I performed the smoothing I did in this post and the result is pretty much spot on (assuming the VAT was a one-time event):


Actually the temporary nature of the VAT increase becomes even more apparent if we look at the inflation rate (this time there is no red counterfactual no-VAT scenario):


This goes right through the data with the VAT increase appearing as a spike.

Overall, there doesn't yet appear to be any reason to abandon the information transfer model.

Update/correction 9/30/2014:


The first graph was a bit messed up. I correct a couple of the graphs and add data points here:

http://informationtransfereconomics.blogspot.com/2014/09/inflation-in-japan-updatecorrection.html

14 comments:

  1. Jason, O/T: have you ever looked into the effects of what denominations of currency exist? I thought to ask you after reading this:

    http://jpkoning.blogspot.com/2014/09/draghis-fake-zero-lower-bound-and-those.html

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    1. That's interesting because there are a couple of features of M0 for € that are problematic for the price level and both of them seem to be due to the 500 € note.

      It may be that the 500€ note is irrelevant to inflation (functioning more like reserves than currency).

      That may be a special case -- the key question is whether the currency defines the market unit of information. Maybe only one denomination does that ... Maybe lower or higher denominations aren't relevant.

      However only in the case of the € (thus far!) is there room for improvement in the price level fit. Macro data may not be precise enough except in a few special cases ...

      I'll see if taking the 500€ "out of circulation" makes a difference though.

      Delete
  2. is your modl more monetarist, Keynesian, or 'real business cycle'?

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    Replies
    1. It's pretty much a monetarist model, but it has a Keynesian approximation (ISLM-like model) in certain cases and "printing money" can fail to produce inflation sometimes.

      If you are familiar with complex analysis, a good analogy is that it is an analytic continuation between a monetarist and Keynesian theory :)

      Delete
  3. O/T: Sumner has a follow on question in your last thread. You should probably undo any damage I've done while you're at it. :D

    http://www.themoneyillusion.com/?p=27438#comment-363927

    ReplyDelete
  4. The Yen is down about 6% relative to the dollar in the last month. I think your model is good for regular inflation, but not at predicting hyperinflation. I think Japan is entering the death spiral of hyperinflation.

    http://howfiatdies.blogspot.com/2014/09/japanese-yen-heading-for-hyperinflation.html

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    Replies
    1. Vincent, regarding exchange rates, check out the thread I link to above, here for your convenience:

      http://www.themoneyillusion.com/?p=27438#comment-363927

      Delete
    2. Hi Vincent, I did try to look into exchange rates in Japan ... It appears you can have a falling exchange rate even with deflation (both supply and demand matter)

      http://informationtransfereconomics.blogspot.com/2014/09/what-do-exchange-rates-measure.html

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    3. Again, you are looking at mild cases.

      I think in hyperinflation cases that the exchange rate falls dramatically ahead of when prices really go up. Wish I had all kinds of data. It makes imports more expensive and also foreigners bid up prices of exports in local currency. The higher prices for imports and exports eventually drive up prices for everything else.

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    4. Ah, but the decrease is very small if viewed over the long run ... here is the daily exchange rate; if you zoom in and zoom out, you can see that the recent run up from about 80 yen to the dollar to about 105 yen to the dollar is a tiny fluctuation:

      http://research.stlouisfed.org/fred2/series/DEXJPUS

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    5. In my theory things get setup for a chain reaction and then it happens. Abenomics has made lots of new money over that last 1.5 years. Bond prices went down to crazy low levels. It no longer makes sense for anyone to hold JGBs. I claim Japan just needs some kind of trigger. I wonder/think that 5% in a month might be such a trigger. Interest rates are 0.5% on the 10 year bond, so this is like losing 10 years worth of interest in a month, sort of. It is no longer rational to hold JGBs. When people start panicing things will happen fast. I don't mean that this move is the dramatic move, just that this move may be enough to trigger a big move, given all the setup that now exists. I will watch the next month with much interest.

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    6. I'm going to keep watching too; we'll see how these two models compare!

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    7. I meant bond yields went to crazy low levels and bond prices high. To me they have spent so much money driving up the prices of bonds that they are clearly in a bubble. The prices are too high. But if the central bank keeps buying fast enough they can keep interest rates down, but the Yen will go down too.

      Delete

Comments are welcome. Please see the Moderation and comment policy.

Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.