THE EFFECT OF NOMINAL DEMAND SHOCKS ON MANUFACTURING OUTPUT - EVIDENCE FROM DISAGGREGATED AUSTRALIAN DATA

The menu costs model predicts that during times of rapid inflation fir ms are less likely to vary output in response to changes in nominal ag gregate demand. This paper tests the proposition using a disaggregated sample of Australian three-digit ASIC manufacturing industries. The r esults show that a significant number of Australian industries exhibit behaviour that is consistent with this prediction. In addition, the r esults show that the variability of inflation and changes to the impor t penetration ratio also influence the response of output to nominal d emand changes.