Summary
This paper describes a theoretical and empirical study of the Japanese macroeconomy that focuses on the role of predetermined nominal wages in the relation between monetary policy and aggregate output. The main features of the model are that nominal wage rates set at Shunto are equal to rational expectations of the nominal wage rates that would be consistent with target levels of real output and that firms determine employment and output by equating marginal productivities to real wage rates. The essential implication of the model is that the current deviation of aggregate output from its target level depends only on innovations in inflation and productivity since the last Shunto. The equation derived to implement the model empirically relates current aggregate output growth in a precise way to Past values of output growth and inflation since the last Shunto and includes an explicit specification of a white noise error term. The results of econometric analysis of this restricted model equation are consistent with the hypothesis that nominal wages, predetermined according to Shunto with rational expectations, are important for the determination of real aggregates.
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Support for this research included a grant from the Joint Committee on Japanese Studies of the Social Research Council and the American Council of Learned Societies with funds provided by the National Endowment for the Humanities and the Ford Foundation and a grant from the National Science Foundation (SES-8408873). Jun Il Kim and Michelle Garfinkel provided excellent research assistance. We acknowledge the helpful comments of anonymous referees.
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Grossman, H.I., Haraf, W.S. Shunto, rational expectations, and output growth in Japan. Empirical Economics 14, 193–213 (1989). https://doi.org/10.1007/BF01972390
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DOI: https://doi.org/10.1007/BF01972390