Imperfect Information, Heterogeneous Demand Shocks, and Inflation Dynamics

Using sector-level survey data for the universe of Japanese firms, we establish positive co-movement in firm’s expectations about aggregate and sector-specific demand shocks. We show that a simple model with imperfect information on current components explains data. The predicts an increase relative volatility shocks compared to reduces sensitivity inflation changes demand. test corroborate theoretical prediction find observed decrease has played significant role decline movements from mid-1980s mid-2000s.