SOME INTRANATIONAL EVIDENCE ON OUTPUT-INFLATION TRADE-OFFS

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