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By Christine Sauer

by Jerome L. Stein Disenchantment with Keynesian econollics built through the post-1968 interval while the speed of development of output declined, the speed of unemployment rose, and the speed of inflation elevated within the U.S. and in different international locations. This paradox, referred to as stagflation, was once inconsistent with the guideline of Keynesian economics that cyclical movemants in costs and output relative to their respective traits are definitely correlated. A seek happened for a extra passable concept of macroeconomics that can clarify the ambiguity of stagflation and the saw financial phenomena. the hot Classical Economics (NCE) built because the overall rejection of Keynesian economics. The Keynesians claimed that their call for administration regulations contributed to the obsolescence of the enterprise cycle and effectively eradicated the space among complete employment (potential) output and actusl output. The NCE argued simply the other: the unemplo~nt cost or progress price of genuine output is insensitive to systematic call for administration guidelines [Lucas; Sargent and Wallace].

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Additional info for Alternative Theories of Output, Unemployment, and Inflation in Germany: 1960–1985

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Estimation proceeds after correcting for negligible first-order autocorrelation, and the Theil criterion is used to determine the lag length and the degree of the polynomial. The results strongly support the RENR hypothesis that only unanticipated money growth has significant real effects, a result which is structurally stable across different subperiods. Interestingly, neither foreign variables nor the exchange rate regime have any bearing on the results. Hansen (1986) introduces fiscal and foreign variables into a rational expectations model to test the New Classical hypotheses about the determination of real output and the price level with German deta from 1972-82.

Thus, "rational" expectations are invoked in a very narrow sense. The information set of rational economic agents excludes any knowledge about the determination of the impulse variables. The estimated inflation equation indicates that unanticipated impulses are insignificant. Over 80% of inflation can be explained by potential output growth as well as anticipated impulses from monetary policy, government spending, and relative import prices. Monetary impulses are the dominant force. Real output growth depends significantly on the growth of potential GNP and on unanticipated impulses from monetary policy, government spending, export demand, and relative import prices.

The results strongly support the RENR hypothesis that only unanticipated money growth has significant real effects, a result which is structurally stable across different subperiods. Interestingly, neither foreign variables nor the exchange rate regime have any bearing on the results. Hansen (1986) introduces fiscal and foreign variables into a rational expectations model to test the New Classical hypotheses about the determination of real output and the price level with German deta from 1972-82.

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