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The Output-Inflation Trade-off in African Less Developed Countries

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  • Mark J. Holmes

    (Department of Economics, Loughborough University)

Abstract

This paper investigates the nature of the short-run output-inflation trade-off and policy effectiveness in African less developed countries. Using a sample of thirteen countries over the period 1960-98, cointegration and error correction modelling suggest that the impacts on inflation and real output growth from a shock to nominal aggregate demand will be of the ratio one-sixth to five-sixths. Furthermore, this study finds that the short-run potency of demand-side policy on inflation (real output growth) is positively (inversely) related to the variability of nominal income shocks rather than the underlying rate of inflation. While the speed of adjustment towards long-run equilibrium between price and nominal output is fairly sluggish, it is concluded that the New Classical perspective on the trade-off is applicable in the case of African economies. The New Keynesian perspective, which emphasises wage and price rigidities and policy effectiveness, is probably of lesser relevance.

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Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 25 (2000)
Issue (Month): 1 (June)
Pages: 41-55

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Handle: RePEc:jed:journl:v:25:y:2000:i:1:p:41-55

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  1. McNown, Robert & S. Wallace, Myles, 1989. "National price levels, purchasing power parity, and cointegration: a test of four high inflation economies," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 533-545, December.
  2. Paul Collier & Jan Willem Gunning, 1997. "Explaining African economic performance," CSAE Working Paper Series 1997-02.2, Centre for the Study of African Economies, University of Oxford.
  3. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
  4. Peter Liu, 1992. "Purchasing power parity in Latin America: A co-integration analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(4), pages 662-680, December.
  5. Fernandez, Roque B, 1977. "An Empirical Inquiry on the Short-Run Dynamics of Output and Prices," American Economic Review, American Economic Association, vol. 67(4), pages 595-609, September.
  6. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  9. Katsimbris, George M, 1990. "Intracountry Evidence on the Lucas Variance Hypothesis," Economic Inquiry, Western Economic Association International, vol. 28(4), pages 756-73, October.
  10. Jung, W. S., 1985. "Output-inflation tradeoffs in industrial and developing countries," Journal of Macroeconomics, Elsevier, vol. 7(1), pages 101-113.
  11. Attfield, Clifford L F & Duck, Nigel W, 1983. "The Influence of Unanticipated Money Growth on Real Output: Some Cross-Country Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 442-54, November.
  12. Mahdavi, Saeid & Zhou, Su, 1994. "Purchasing power parity in high-inflation countries: further evidence," Journal of Macroeconomics, Elsevier, vol. 16(3), pages 403-422.
  13. Holmes, Mark J, 2000. "Does Purchasing Power Parity Hold in African Less Developed Countries? Evidence from a Panel Data Unit Root Test," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 9(1), pages 63-78, March.
  14. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, September.
  15. Addison, John T. & Chappell, Henry Jr. & Castro, Alberto C., 1986. "Output-inflation tradeoffs in 34 countries," Journal of Economics and Business, Elsevier, vol. 38(4), pages 353-360, December.
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