International Evidence on a New Keynesian Theory of the Output-Inflation Trade-off

Abstract

This article provides empirical evidence on the validity of a "New Keynesian" theory of the output-inflation tradeoff. The theory, offered by Laurence Ball, N. Gregory Mankiw, and David Romer (1988), synthesizes recent work on "menu costs" and imperfect competition used to ground Keynesian theory in maximizing behavior. The present paper focuses on a key prediction, namely, that higher average inflation makes output less sensitive to nominal shocks. That proposition is tested using data for each of forty-three countries. Importantly, average inflation is found to have the predicted effect in a significant fraction of those countries, an outcome which supports the New Keynesian view. Copyright 1991 by Ohio State University Press.

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