THE EVIDENCE ON INTERNATIONAL OUTPUT-INFLATION TRADE-OFFS - AN EVALUATION

Combining and processing the information in ten previously published s tudies, we analyse the Lucas variability hypotheses. When adequate acc ount is taken of structural differences between developing and develop ed countries, the prediction of the Lucas model that higher nominal de mand variability leads to a lower inflation-output trade-off must be r ejected for the group of developed countries. This does not imply that developed countries can use active demand policies without deteriorat ing their short-run inflation-output trade-off. More realistically, th e result suggests that nominal demand variability is an inadequate ind icator of demand shocks for the group of developed countries. This may be due to relatively low inflation levels and variability in the deve loped countries. For the developing countries where nominal (inflation ary) shocks dominate, this may be less of a problem.