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Supply-Side Macro-economics

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  • John F. Helliwell

Abstract

This paper tests New Classical and Keynesian explanations of output determination within an encompassing "factor utilization" model wherein the output decision by producers is modelled as the choice of a utilization rate for employed factors. In this encompassing model, the ratio of actual to normal output (with the latter defined by a nested CES vintage production function with capital, energy and employment as factor inputs) is explained by unexpected sales (a Keynesian element), abnormal profitability (one component of which is the Lucas "price surprise" effect), and abnormal inventories. Results using Canadian data show that the Keynesian and New Classical elements contribute explanatory power, as does the production-function-based measure of normal output, while each of these partial models is strongly rejected in favour of the encompassing model. The highly structured factor utilization model is also seen to fit better than an unstructured VAR model. U.S. data confirm the results, and show that there are significant effects from abnormal demand, profitability and inventory levels even if the labour and capital components of normal output are defined using hours and utilized capital rather than employment and the capital stock. The results are also confirmed using alternative output (and hence input) concepts, using a translog function instead of a CES function to define normal output, and using data for several other major industrial countries.
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Suggested Citation

  • John F. Helliwell, 1986. "Supply-Side Macro-economics," Canadian Journal of Economics, Canadian Economics Association, vol. 19(4), pages 597-625, November.
  • Handle: RePEc:cje:issued:v:19:y:1986:i:4:p:597-625
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    References listed on IDEAS

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    1. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-580, August.
    2. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
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    Cited by:

    1. Pierre Fortin, 2003. "Issues and Commentaries Issues et commentaires Keynes Resurrected," Canadian Public Policy, University of Toronto Press, vol. 29(2), pages 253-265, June.
    2. John F. Helliwell & Alan Chung, 1991. "Macroeconomic Convergence: International Transmission of Growth and Technical Progress," NBER Chapters,in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 388-436 National Bureau of Economic Research, Inc.
    3. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402.
    4. Ying Kong, 2004. "The price premium of generic to brand-names and pharmaceutical price index," Applied Economics, Taylor & Francis Journals, vol. 36(7), pages 731-737.
    5. Simon Cueva & Éric Heyer, 1997. "Fonction de production et degrés d'utilisation du capital et du travail : une analyse économétrique," Économie et Prévision, Programme National Persée, vol. 131(5), pages 93-111.

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