Output-inflation trade-off at near-zero inflation rates

The purpose of this paper is to provide new evidence about the cost of near -zero inflation using Japanese data. We test the hypothesis that the short- run Phillips curve becomes flatter as the rate of inflation approaches zero . In implementing the test, we pay special attention to how to control for other factors affecting the rate of inflation. First, we use the skewness o f the distribution of relative-price changes as a measure of supply shocks. Second, we use information contained in the cross-prefecture Phillips curv e to control for changes in the expected rate of inflation. Through a serie s of empirical analyses, we find evidences consistent with the hypothesis. In particular, we find that the estimated slope in the 1990s is smaller tha n before. Research and Statistics Department, Bank of Japan and Institute o f Economic Research, Hitotsubashi University. (C) 2000 Academic Press. Jour nal of Economic Literature Classification Numbers: E31, E50.