Nominal Rigidity and Some New Evidence on the New Keynesian Theory of the Output-Inflation Tradeoff

Sun, Rongrong (2012): Nominal Rigidity and Some New Evidence on the New Keynesian Theory of the Output-Inflation Tradeoff.

Abstract

This paper develops a series of tests to check whether the New Keynesian nominal rigidity hypothesis on the output-inflation tradeoff withstands new evidence. In so doing, I summarize and evaluate different estimation methods that have been applied in the literature to address this hypothesis. Both cross-country and over-time variations in the output-inflation tradeoff are checked with the tests that differentiate the effects on the tradeoff that are attributable to nominal rigidity (the New Keynesian argument) from those ascribable to variance in nominal growth (the alternative new classical explanation). I find that in line with the New Keynesian hypothesis, nominal rigidity is an important determinant of the tradeoff. Given less rigid prices in high-inflation environments, changes in nominal demand are transmitted to quicker and larger movements in prices and lead to smaller fluctuations in the real economy. The tradeoff between output and inflation is hence smaller.

• Item Type: MPRA Paper
• Language: English
• Keywords: the output-inflation tradeoff, nominal rigidity, trend inflation, aggregate variability
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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