| Abstract: | Over a sample of nineteen industrial countries, more variable aggregate demand and/or higher mean inflation attenuates (augments) the effect of aggregate demand shocks on real output growth (wage and price inflation) while having no effect on the response of the real wage to such shocks. In all countries examined, aggregate demand shocks are positively (negatively) correlated with nominal variables (real output). Among explanations of the business cycle based on shocks to aggregate demand, this evidence favors the new Keynesian sticky wage explanation over the sticky price and the new classical imperfect information explanations. |
