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Anticipated Inflation, the Frequency of Transactions, and the Slope of the Phillips Curve

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  • Zvi Hercowitz

Abstract

This paper examines the effects of expected inflation on the responsiveness of output to nominal disturbances in the framework of a localized markets model. The mechanism described in the theoretical part of the paper is that expected inflation has a positive effect on the transaction frequency, which in turn increases the flow of price information across markets. More information implies less misperception of monetary shocks as relative shifts in excess demand, resulting in lower sensitivity of real output to these socks. The empirical implication of this proposition -- namely ,that expected inflation reduces the coefficient of nominal shocks in an output equation -- is tested first using data across countries, and then with time series data from the United States. The first test uses Lucas's and Alberro's estimates of Phillips Curve coefficients from different countries and the corresponding average inflation rates. The second test involves data from the post-World War II period. It uses nominal rates of return on Treasury Bills and corporate bonds as measures of anticipated inflation and Barro's estimates of unanticipated money. In general, results in both tests provide support (stronger than expected)for the implication of the theory.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0518.

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Date of creation: Jul 1980
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Publication status: published as Journal of Money, Credit and Banking, Vol. 15, no. 2 (1983): 139-154.
Handle: RePEc:nbr:nberwo:0518

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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. Feige, Edgar L & Parkin, Michael, 1971. "The Optimal Quantity of Money, Bonds, Commodity Inventories, and Capital," American Economic Review, American Economic Association, vol. 61(3), pages 335-49, June.
  3. Barro, Robert J., 1970. "Inflation, the Payments Period, and the Demand for Money," Scholarly Articles 3451392, Harvard University Department of Economics.
  4. Grossman, Herschel I & Policano, Andrew J, 1975. "Money Balances, Commodity Inventories, and Inflationary Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1093-1112, December.
  5. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
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Cited by:
  1. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  2. 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.
  3. 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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