On the long-run output-price relationship

Abstract

Since Lucas's [AER, 1973] finding that there is a natural rate of output and that average real output is not affected by the variations of average inflation rate, a number of studies [Froyen and Waud, AER, 1980; Kormendi and Meguire, JPE, 1984; Jung, JM, 1985; Cover, JM, 1989] have attempted to investigate the Lucas model with different sets of data and statistical techniques. These studies concentrated on the effect of unexpected changes in prices on the short-term output level. For example, Jung [JM, 1985] found that for developing countries the Lucas model only had weak support. Cover [JM, 1989] also indicated that in 15 out of 25 countries under study, output was affected by unexpected changes in prices. This paper examines the real output-price relationship based on the long-run behavior of a sample of 20 OECD countries. Assume that the aggregate supply curve is nonlinear and that the price level may have a greater effect on output when the former is relatively low and vice versa. First, the growth rate of real output (GQ) and the growth rate of the price level (GP) over the period 1960-1986 were calculated. Applying the BoxCox transformation of variables, regress GQ~ < on GP~. The estimated regression and t-statistics in parentheses are presented below: