Some intranational evidence on output-inflation trade-offs

Gregory D. Hess, Kwanho Shin

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

In a seminal paper, Robert E. Lucas, Jr. provided the theoretical relationship between aggregate demand and real output based on relative price confusion at the individual market level. Subsequently, an alternative New Keynesian aggregate supply relationship was derived and it was demonstrated that the two theories can be distinguished on the basis of how both the rate of inflation and the volatility of relative prices affect its slope. By emphasizing the first implication of New Keynesian theory, strong evidence was obtained supporting this model using international data. We also concentrate on the second difference between the two theories. We derive the individual market-level equilibrium relationship for the Lucas model, i.e., the disaggregate supply curve. We estimate the crucial parameters of the relationship between aggregate nominal demand shocks and real output using U.S. intranational state and industry data. We find that the Lucas model omits important New Keynesian features of the data.

Original languageEnglish
Pages (from-to)187-203
Number of pages17
JournalMacroeconomic Dynamics
Volume3
Issue number2
Publication statusPublished - 1999 Jun 1

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Keywords

  • Lucas's island model
  • New Keynesian theory

ASJC Scopus subject areas

  • Economics and Econometrics

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