Econometric Approach of Residential Rents Rigidity -Micro Structure and Macro Consequences-

Why was the Japanese consumer price index for rents so stable even during the period of housing bubble in the 1980s? In addressing this question, we start from the analysis of microeconomic rigidity and then investigate its implications about aggregate price dynamics. We find that ninety percent of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the US. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state dependent but time dependent. These two results indicate that both intensive and extensive margins of rent adjustments are very small, thus yielding a slow response of the CPI to aggregate shocks. We show that the CPI inflation rate would have been higher by one percentage point during the bubble period and lower by more than one percentage point during the period of bubble bursting, if the Japanese housing rents were as flexible as in the US