Supply-Side Macroeconomics

John F. Helliwell

NBER Working Paper No. 1995 (Also Reprint No. r0824)
Issued in August 1986
NBER Program(s):Economic Fluctuations and Growth

This paper tests New Classical and Keynesian explanations of

output determination within an encompassing "factor utilization"

model wherein the output decision by producers is modelled as the

choice of a utilization rate for employed factors. In this

encompassing model, the ratio of actual to normal output (with

the latter defined by a nested CES vintage production function

with capital, energy and employment as factor inputs) is

explained by unexpected sales (a Keynesian element), abnormal

profitability (one component of which is the Lucas "price

surprise" effect), and abnormal inventories.

Results using Canadian data show that the Keynesian and New

Classical elements contribute explanatory power, as does the

production-function-based measure of normal output, while each of

these partial models is strongly rejected in favour of the

encompassing model. The highly structured factor utilization

model is also seen to fit better than an unstructured VAR model.

U.S. data confirm the results, and show that there are

significant effects from abnormal demand, profitability and

inventory levels even if the labour and capital components of

normal output are defined using hours and utilized capital rather

than employment and the capital stock. The results are also

confirmed using alternative output (and hence input) concepts,

using a translog function instead of a CES function to define

normal output, and using data for several other major industrial


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Document Object Identifier (DOI): 10.3386/w1995

Published: "Supply-side Macro-economics." From Canadian Journal of Economics, Vol. 19, No. 4, pp. 597-625, (November 1986). citation courtesy of

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