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AIL Theory and the Ailing Phillips Curve: A Contract-Based Approach to Aggregate Supply

In: Asymmetric Information, Corporate Finance, and Investment

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  • Roger E. A. Farmer

Abstract

This paper presents empirical evidence from U.S. data of a structurally stable aggregate supply relationship between real and nominal rates of interest and the rate of unemployment. The paper reviews theories of contracts that are based on the twin assumptions of asymmetric information and limited collateral and it argues that these theories (referred to as A.I.L. theories) provide a strong theoretical foundation for a contract-based theory of aggregate supply. It is suggested that the original Phillips curve estimates should be reinterpreted in the light of A.I.L. theories which represent alternatives to the Phelps-Friedman interpretation of the Phillips relationship.

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This chapter was published in:

  • R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1, January.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11473.

    Handle: RePEc:nbr:nberch:11473

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    1. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc.
    3. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
    4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    5. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Smith, Bruce, 1983. "Limited Information, Credit Rationing, and Optimal Government Lending Policy," American Economic Review, American Economic Association, vol. 73(3), pages 305-18, June.
    7. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 129-56, January.
    8. Farmer, Roger E A, 1984. "A New Theory of Aggregate Supply," American Economic Review, American Economic Association, vol. 74(5), pages 920-30, December.
    9. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
    10. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 153-74, January.
    11. Romer, Christina, 1986. "Spurious Volatility in Historical Unemployment Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 1-37, February.
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    Cited by:
    1. Broersma, L., 1991. "The relation between unemployment and interest rate : application of an ARX approach," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0057, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    2. Bierens, H.J. & Broersma, L., 1990. "The relation between unemployment and interest rate : some empirical evidence," Serie Research Memoranda 0078, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    3. Patrick Asea & S. Brook Blomberg, 1997. "Lending Cycles," UCLA Economics Working Papers 764, UCLA Department of Economics.
    4. Bierens, H.J. & Broersma, L., 1991. "The relation between unemployment and interest rate : some international evidence," Serie Research Memoranda 0112, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.

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