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The Changing Relationship Between Aggregate Price and Output: The British Experience

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  • Richard T. Froyen
  • Roger N. Waud

Abstract

Over the past two and a half decades Great Britain has exhibited the most noticeable increase in inflation variability among the ten major noncommunist industrialized countries. In addition, there has been an apparent worsening in the output-inflation tradeoff. This paper attempts to identify and empirically assess possible causes of the deterioration in the British output-inflation tradeoff in the context of a new classical-type model. Supply-side shocks can cause an increase in the inflation rate and a decrease in real output, and it is estimatedthat such shocks interacted with inflation variability to reduce real output roughly 3.3 percent between the period 1957-1968 and the period 1969-1980. Also contributing to the deterioration in the output-inflation tradeoff, it is estimated that the decline in the natural rate of real output due to inflation variability (as hypothesized by Milton Friedman) amounted to about 2.3 to 2.5 percent between these two subperiods.

Suggested Citation

  • Richard T. Froyen & Roger N. Waud, 1983. "The Changing Relationship Between Aggregate Price and Output: The British Experience," NBER Working Papers 1134, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1134
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    Cited by:

    1. Froyen, Richard T & Waud, Roger N, 1988. "Real Business Cycles and the Lucas Paradigm," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 183-201, April.
    2. Apergis, Nicholas & Miller, Stephen, 2004. "Macroeconomic rationality and Lucas' misperceptions model: further evidence from 41 countries," Journal of Economics and Business, Elsevier, vol. 56(3), pages 227-241.
    3. John A. James, 1985. "Shifts in the Nineteenth-Century Phillips Curve Relationship," NBER Working Papers 1587, National Bureau of Economic Research, Inc.
    4. Nicholas Aspergis & Stephen M. Miller, 2003. "Macroeconomic Rationality and Lucas' Misperceptions Model: Further Evidence from Forty-One Countries," Working papers 2003-26, University of Connecticut, Department of Economics.

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