The New Classical vs the New Keynesian Debate on the Output-Inflation Tradeoff: Evidence from Four Industrialized Countries

Based on quarterly data for Canada, Germany, the United Kingdom, and the United States, this paper tests the New Classical view against the extended New Keynesian view about the factors underlying the output-inflation tradeoff. The simple Lucas is amended to reflect the presence of serial correlation in nominal aggregate demand shocks. We find that the mean rate of inflation has a statistically significant negative effect on the coefficient of the anticipated component of nominal aggregate demand shocks in all four countries and a statistically significant negative effect on the coefficient of the unanticipated component in every country but Germany. Aggregate volatility affects the output-inflation tradeoff in two of the four countries. These findings are in line with the New Keynesian view but cast serious doubts on the New Classical view.


Issue Date:
Mar 01 1994
Publication Type:
Working or Discussion Paper
Language:
English
Total Pages:
29
Series Statement:
9403




 Record created 2017-09-28, last modified 2017-09-28

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