Anticipated Inflation, the Frequency of Transactions, and the Slope of the Phillips Curve

42 Pages Posted: 3 Jan 2002 Last revised: 3 Jun 2021

See all articles by Zvi Hercowitz

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1980

Abstract

This paper examines the effects of expected inflation on the responsiveness of output to nominal disturbances in the framework of a localized markets model. The mechanism described in the theoretical part of the paper is that expected inflation has a positive effect on the transaction frequency, which in turn increases the flow of price information across markets. More information implies less misperception of monetary shocks as relative shifts in excess demand, resulting in lower sensitivity of real output to these socks. The empirical implication of this proposition -- namely ,that expected inflation reduces the coefficient of nominal shocks in an output equation -- is tested first using data across countries, and then with time series data from the United States. The first test uses Lucas's and Alberro's estimates of Phillips Curve coefficients from different countries and the corresponding average inflation rates. The second test involves data from the post-World War II period. It uses nominal rates of return on Treasury Bills and corporate bonds as measures of anticipated inflation and Barro's estimates of unanticipated money. In general, results in both tests provide support (stronger than expected)for the implication of the theory.

Suggested Citation

Hercowitz, Zvi, Anticipated Inflation, the Frequency of Transactions, and the Slope of the Phillips Curve (July 1980). NBER Working Paper No. w0518, Available at SSRN: https://ssrn.com/abstract=263399

Zvi Hercowitz (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

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National Bureau of Economic Research (NBER)

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