On Structural Change and Forecasting Performance Stability of Japanese Phillips Curve Models

Abstract

This paper statistically investigates structural change in the Japanese Phillips curve models and their forecasting performance stability. I find that there are three significant mean shifts in Japanese inflation data from 1970 to 2013. By considering them as exogenous effects, I did not find significant structural change in the Phillips curve slope coefficients in most cases of various real economic activity measures. However, if the model includes inflation expectation in the manner of rational expectation, the coefficients are found to be less stable. I also find evidence of so-called forecast beakdown in inflation forecasts if I use the Phillips curve model estimated by the data after 1982 in which the coefficients are deemed to be stable, together with inflation data with the mean shifts to account for possible exogenous mean shifts in the future.