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Unanticipated or Actual Changes in Aggregate Demand Variables: A Cross-Country Analysis

  • Michael R. Darby

This paper generalizes the Barro approach to explaining real income growth as the solution of a Lucas aggregate supply function and an aggregate demand function with nominal money, real government spending, and real exports as arguments. The resulting real income equation involves lagged transitory income and short distributed lags on the shocks (innovations) in the three aggregate demand variables. This equation was estimated using quarterly data from 1957 through 1976 for the United States, United Kingdom, Canada, France, Germany, Italy, Japan and the Netherlands. While the data are not inconsistent with the model's restrictions, it is found that with the exception of the United States, unanticipated and actual changes in aggregate demand variables are about equally poor as explanations of real income growth. Although these results can be rationalized by greater measurement errors in the foreign data, they are sufficiently surprising to warrant further investigation and cautious application of at least Barro's approach to the Lucas aggregate supply function.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0589.

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Date of creation: Dec 1980
Date of revision:
Publication status: published as Proceedings of Fourth West Coast Academic/Federal Reserve Economic Research Seminar (Fall 1980), Supplement.
Handle: RePEc:nbr:nberwo:0589
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers 48, Federal Reserve Bank of Minneapolis.
  2. 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.
  3. Charles Pigott, 1978. "Rational expectations and counter-cyclical monetary policy: the Japanese experience," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 6-22.
  4. Boschen, John F. & Grossman, Herschel I., 1982. "Tests of equilibrium macroeconomics using contemporaneous monetary data," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 309-333.
  5. McCallum, Bennett T, 1978. "Price Level Adjustments and the Rational Expectations Approach to Macroeconomic Stabilization Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(4), pages 418-36, November.
  6. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
  7. 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.
  8. Garber, Steven & Klepper, Steven, 1980. "Extending the Classical Normal Errors-in-Variables Model," Econometrica, Econometric Society, vol. 48(6), pages 1541-46, September.
  9. Leiderman, Leonardo, 1980. "Macroeconometric testing of the rational expectations and structural neutrality hypotheses for the United States," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 69-82, January.
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