The evidence on international output-inflation trade-off: an evaluation

Abstract

Combining and processing the information in ten previously published studies, we analyse the Lucas variability hypotheses. When adequate account is taken of structural differences between developing and developed countries, the prediction of the Lucas model that higher nominal demand variability leads to a lower inflation-output trade-off must be rejected for the group of developed countries. This does not imply that developed countries can use active demand policies without deteriorating their short-run inflation-output trade-off. More realistically, the result suggests that nominal demand variability is an inadequate indicator of demand shocks for the group of developed countries. This may be due to relatively low inflation levels and variability in the developed countries. For the developing countries where nominal (inflationary) shocks dominate, this may be less of a problem.