Abstract ：
This paper analyzes the aggregate inflation dynamics based on the spatial model that allows the asymmetric regional spillover effects using Japanese prefectural panel data. We simulate how the shocks in regional inflation affect the aggregate inflation and evaluate which region should be targeted for achieving high aggregate inflation. Our finding suggests that policies targeting rural rather than urban areas are important for activating the aggregate economic activity reflected in the price level. Our findings further suggest that the monetary policy of “price stability target” should also set up the “rural price stability target” to achieve national “price stability target.”

Keywords : Regional inflation; Spillover effect; law of one price

JEL code: E31,R22