On the Real Effects of Inflation and Relative-Price Variability: Some Empirical Evidence

Abstract

W ITH the acceleration of the inflationary process the study of the real effects of inflation, whether anticipated or unanticipated, has attracted a great deal of attention. Less effort, however, has been directed to the analysis of the effects of uneven inflation, and to the study of the impact of relative-price variability on real economic variables. The purpose of this paper is to present empirical evidence concerning the effects of relative-price variability on the rate of unemployment and on the level of output for the postwar United States. Moreover, in the course of the analysis new evidence is presented on the different effects of expected and unexpected inflation on output and unemployment, evidence which bears on the Natural-Rate Hypothesis.I Most of the previous literature on relativeprice variability under inflationary conditions has focused on isolating the main explanatory variables for such variability.2 Yet little is known, empirically, about the effects of such variability on the real sector of the economy. It is interesting to note, however, that prominent economists have advanced a specific hypothesis about such effects. For example, Friedman (1977), in his Nobel Lecture, hypothesized that increased volatility of inflation reduces the efficiency of market prices as coordinators of economic activity, and that therefore