THE EFFECT OF NOMINAL DEMAND SHOCKS ON MANUFACTURING OUTPUT - EVIDENCE FROM DISAGGREGATED AUSTRALIAN DATA

The menu costs model predicts that during times of rapid inflation firms are less likely to vary output in response to changes in nominal aggregate demand. This paper tests the proposition using a disaggregated sample of Australian three-digit ASIC manufacturing industries. The results show that a significant number of Australian industries exhibit behaviour that is consistent with this prediction. In addition, the results show that the variability of inflation and changes to the import penetration ratio also influence the response of output to nominal demand changes.