The Relationship Between the Variability of Output and the Variability of Nominal Schocks: Japan 1970-1985

Abstract

This study attempts to relate the level of output to the variability of monomial and real shocks. Expectations are assumed to be formed rationally and Mishkin's (1983) empirical methodology is used. The results obtained using Japanese data for the January 1970 to December 1974 period show that higher and more variable rates of inflation are associated with a rise in unemployment and a reduction in real output. The converse case holds for the April 1981 to June 1985 period in which the tradeoff between output growth and inflation became more favorable. The results indicate that the variability of real or aggregate supply shocks, rather than the variability of monomial shocks, was significant in explaining the response of output.