INTRACOUNTRY EVIDENCE ON THE LUCAS VARIANCE HYPOTHESIS

Intracountry time-series evidence for a sample of thirty-nine countries fails to provide strong support for the basic implications of the Lucas aggregate supply model, namely: there exists a negative relationship between the output-inflation tradeoff and the variability of both nominal aggregate demand and the rate of inflation, and a positive relationship exists between the variabilities of the inflation rate and aggregate demand. The findings differ from those of most of the previous cross-sectional studies, which found support for the Lucas variance hypotheses, but are consistent with Froyen and Waud's [1980; 1984].