Unanticipated or Actual Changes in Aggregate Demand Variables: A Cross-Country Analysis

This paper generalizes the Barro approach to explaining real income growth as the solution of a Lucas aggregate supply function and an aggregate demand function with nominal money, real government spending, and real exports as arguments. The resulting real income equation involves lagged transitory income and short distributed lags on the shocks (innovations) in the three aggregate demand variables. This equation was estimated using quarterly data from 1957 through 1976 for the United States, United Kingdom, Canada, France, Germany, Italy, Japan and the Netherlands. While the data are not inconsistent with the model's restrictions, it is found that with the exception of the United States, unanticipated and actual changes in aggregate demand variables are about equally poor as explanations of real income growth. Although these results can be rationalized by greater measurement errors in the foreign data, they are sufficiently surprising to warrant further investigation and cautious application of at least Barro's approach to the Lucas aggregate supply function.