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Demand Variability, Supply Shocks and the Output-Inflation Tradeoff

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  • Richard T. Froyen
  • Roger N. Waud

Abstract

This paper examines the shift in the relation between the inflation rate and the rate of growth of real output which has occurred in the United States over the past three decades, and attempts to assess the relative importance of three possible lines of explanation: a) the new classical view of the output-inflation tradeoff, initially specified by Lucas;b) the effect of supply-side shocks, such as energy prices; c) the effect of inflation variability on the natural rate of real output, as hypothesized by Milton Friedman. The paper concludes that b) and c) seem to have played a significant role in the observed shift from a positive to a negative correlation between the rate of inflation and the rate of real output growth,but that a) did not.

Suggested Citation

  • Richard T. Froyen & Roger N. Waud, 1983. "Demand Variability, Supply Shocks and the Output-Inflation Tradeoff," NBER Working Papers 1081, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1081
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    References listed on IDEAS

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    1. Azariadis, Costas, 1981. "A Reexamination of Natural Rate Theory," American Economic Review, American Economic Association, vol. 71(5), pages 946-960, December.
    2. Froyen, Richard T & Waud, Roger N, 1980. "Further International Evidence of Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 70(3), pages 409-421, June.
    3. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
    4. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
    5. Nelson, Charles R, 1979. "Recursive Structure in U.S. Income, Prices, and Output," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1307-1327, December.
    6. Abrams, Richard K. & Froyen, Richard T. & Waud, Roger N., 1983. "The variability of output-inflation tradeoffs," Journal of Economic Dynamics and Control, Elsevier, vol. 5(1), pages 151-171, February.
    7. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    8. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    9. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-1027, December.
    10. Sato, Kazuo, 1972. "Additive Utility Functions with Double-Log Consumer Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 102-124, Jan.-Feb..
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    Cited by:

    1. Salemi, Michael K, 1999. "Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-25, Jan.-Feb..
    2. Sim, Chong Yang, 2021. "A Review on Output-Inflation Trade-off Based on New Classical and New Keynesian Theories," MPRA Paper 105767, University Library of Munich, Germany.
    3. Froyen, Richard T & Waud, Roger N, 1987. "An Examination of Aggregate Price Uncertainty in Four Countries and Some Implications for Real Output," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 353-372, June.
    4. George Katsimbris & Stephen Miller, 1996. "The new Keynesian economics and the output-inflation trade-off," Applied Economics Letters, Taylor & Francis Journals, vol. 3(9), pages 599-602.
    5. Samra Tabassam & Maisam Ali, 2019. "Linking Mechanism of Inward FDI and Bilateral Exchange Rate," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(1), pages 43-51, March.

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