Abstract

Price Change and Output Change: A Short-Run Three-Equation Analysis

This empirical study sets out to analyse the relative magnitudes of price and quantity reactions in terms of time and intensity to monetary and real change impulses. Reference is made to the pertinent results obtained by Milton Friedman, which show that the initial impact of change-inducing impulses primarily affects output, while price change follow later as a rule. The empirical study covers the USA in the period from 1952 to 1976 and uses quarterly values; this period is broken down into two subperiods. The differential effects in question are determined with the aid of a Socalled g variable, the logarithmic difference between the growth rates of the price level and the real change in the GNP. In addition to various moneysupply magnitudes, non-monetary variable for the fiscal impulse, underemployment, labour productivity, etc. are introduced as change-inducing impulses. For the estimates, the Almon method is used to determine the lags, which embrace seven quarters distributed in accordance with a second-degree polynomial. Among the conclusions, one deserving special mention is that the effects of the fiscal impulse on real output are hardly more significant than those on the price level, while the impact of money supply variations is more likely to affect real output than the price level. Furthermore, it proves that - in contrast to earlier periods - in the recent past import prices have excerted a substantial pressure on the inflation rate in the USA.