Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318159 
Year of Publication: 
2019
Series/Report no.: 
BCAM Working Paper No. 1906
Publisher: 
Birkbeck, University of London, Birkbeck Centre for Applied Macroeconomics (BCAM), London
Abstract: 
We establish novel empirical regularities on firms' expectations about aggregate and idiosyncratic components of sectoral demand using industry-level survey data for the universe of Japanese firms. Expectations of the idiosyncratic component of demand differ across sectors, and they positively co-move with expectations about the aggregate component of demand. To study the implications for inflation, we develop a model with firms that form expectations based on the inference of distinct shocks from a common signal. We show that the sensitivity of inflation to changes in demand decreases with the volatility of idiosyncratic component of demand that proxies the degree of shock heterogeneity. We apply principal component analysis on Japanese sectoral-level data to estimate the degree of shock heterogeneity, and we establish that the observed increase in shock heterogeneity plays a significant cant role for the reduced sensitivity of inflation to movements in real activity since the late 1990s.
JEL: 
E31
D82
C72
Document Type: 
Working Paper

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