New international evidence on output-inflation tradeoffs: A note

This note presents some new international evidence for the variance hypothesis by Lucas according to which the output-inflation tradeoff varies inversely with the variance of nominal aggregate demand. The annual cross-country data on 18 countries are used. Over the period 1952–1967 the variance hypothesis gets support, and allowing for serial and contemporaneous correlation of error terms leaves the results practically unaffected. Over the period 1952–1977, however, the variance hypothesis gets stronger support, which is even reinforced by allowing for serial and contemporaneous correlation of error terms between the OLS residuals.