The Output-Inflation Tradeoff in the United States: Evidence on the New Classical vs. New Keynesian Debate

The empirical examination of the output-inflation tradeoff in the United States over a 30 year period reveals that both aggregate uncertainty and average inflation were instrumental in shaping the output-inflation tradeoff. The division of the whole sample period into two distinct sets of subintervals suggests that the New Keynesian view according to which the output-inflation tradeoff is sensitive to changes in average inflation held only unambiguously in the latter part of the respective sample period. The empirical results suggest further that the tradeoff appears to have been sensitive only to changes in aggregate uncertainty in the early part of the sample period, a fact consistent with the New Classical view.