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Some Intranational Evidence On Output-Inflation Trade-Offs

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  • Hess, Gregory D.
  • Shin, Kwanho

Abstract

In a seminal paper, Robert E. Lucas, Jr. provided the theoretical relationshipbetween aggregate demand andreal output based on relative price confusionat the individual market level.Subsequently, an alternative New Keynesian aggregate supply relationshipwas derived and it was demonstratedthat the two theories can be distinguishedon the basis of how both the rate of inflation andthe volatility of relative pricesaffect its slope.By emphasizing the first implication of New Keynesian theory,strong evidence was obtained supporting this modelusing international data.We also concentrate on the second difference between the two theories.We derive the individual market-levelequilibrium relationship for the Lucas model, i.e., the disaggregate supply curve.We estimate the crucial parameters of the relationshipbetween aggregate nominal demand shocks and real outputusing U.S. intranational state and industry data.We find that the Lucas modelomits important New Keynesian features of the data.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 3 (1999)
Issue (Month): 02 (June)
Pages: 187-203

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Handle: RePEc:cup:macdyn:v:3:y:1999:i:02:p:187-203_01

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Cited by:
  1. W. Wascher & Palle S. Andersen, 1999. "Sacrifice ratios and the conduct of monetary policy in conditions of low inflation," BIS Working Papers 82, Bank for International Settlements.
  2. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
  3. Emmanuel De Veirman, 2007. "Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan," Reserve Bank of New Zealand Discussion Paper Series DP2007/14, Reserve Bank of New Zealand.
  4. Amano, Robert & Coletti, Don & Macklem, Tiff, 1999. "Monetary Rules When Economic Behaviour Changes," Working Papers 99-8, Bank of Canada.

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