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The Changing Relationship between Aggregate Price and Output: The British Experience

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  • Froyen, Richard T
  • Waud, Roger N

Abstract

Over the past two and a half decades Great Britain has exhibited the most noticeable increase in inflation variability among the ten major noncommunist industrialized countries. In addition, there has been an apparent worsening in the output-inflation tradeoff. This paper attempts to identify and empirically assess possible causes of the deterioration in the British output-inflation tradeoff in the context of a new classical-type model. Supply-side shocks can cause an increase in the inflation rate and a decrease in real output, and it is estimatedthat such shocks interacted with inflation variability to reduce real output roughly 3.3 percent between the period 1957-1968 and the period 1969-1980. Also contributing to the deterioration in the output-inflation tradeoff, it is estimated that the decline in the natural rate of real output due to inflation variability (as hypothesized by Milton Friedman) amounted to about 2.3 to 2.5 percent between these two subperiods.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 51 (1984)
Issue (Month): 201 (February)
Pages: 53-67

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Handle: RePEc:bla:econom:v:51:y:1984:i:201:p:53-67

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References

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  1. Froyen, Richard T & Waud, Roger N, 1980. "Further International Evidence of Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 70(3), pages 409-21, June.
  2. Mullineaux, Donald J, 1980. "Unemployment, Industrial Production, and Inflation Uncertainty in the United States," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 163-69, May.
  3. Azariadis, Costas, 1981. "A Reexamination of Natural Rate Theory," American Economic Review, American Economic Association, vol. 71(5), pages 946-60, December.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  5. Nelson, Charles R., 1976. "Recursive structure in U.S. income, prices and output," Proceedings, Federal Reserve Bank of San Francisco, issue 1, pages 2-32.
  6. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, vol. 38(3), pages 410-21, May.
  7. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
  8. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-27, December.
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Cited by:
  1. John A. James, 1985. "Shifts in the Nineteenth-Century Phillips Curve Relationship," NBER Working Papers 1587, National Bureau of Economic Research, Inc.
  2. Richard T. Froyen & Roger N. Waud, 1988. "Real Business Cycles and the Lucas Paradigm," NBER Working Papers 2109, National Bureau of Economic Research, Inc.
  3. Apergis, Nicholas & Miller, Stephen, 2004. "Macroeconomic rationality and Lucas' misperceptions model: further evidence from 41 countries," Journal of Economics and Business, Elsevier, vol. 56(3), pages 227-241.
  4. Nicholas Aspergis & Stephen M. Miller, 2003. "Macroeconomic Rationality and Lucas' Misperceptions Model: Further Evidence from Forty-One Countries," Working papers 2003-26, University of Connecticut, Department of Economics.

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