Prices, macroeconomic fluctuations and the new-Keynesian macroeconomics

This dissertation undertakes an empirical examination of the determinants of the output-inflation tradeoff using U.S. industry data. The purpose of the research is to offer a method to test two competing macroeconomic models: the price-misperceptions model and the new-Keynesian model. This is done using OLS regression analysis. The variables used as determinants of the output-inflation tradeoff include the average growth rate of relative price, the variance of the growth rate of relative price, the variance of the growth rate of relative demand, the average growth of compensation per employee, the average growth of productivity per employee, and various measures of market power.

The results of this empirical study tend to offer support to the new-Keynesian model and cast doubt on the price-misperceptions model. When these results are combined with those of Ball, Mankiw and Romer, which are based on a cross-country study, there seems to be an increasing amount of empirical evidence which supports the new-Keynesian model and casts doubt on the price-misperceptions model.