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Abstract 
Oneofthecostsofhighlevelsofinationmaybemisperceptionsofrelativepricesand excessivevolatilityinsectoraloutput.Thispaperthereforeexaminestherelationship betweenthelevelofinationandsectoraloutputgrowthvariabilityinCanadafrom1961:1 to1995:4.Despitethesubstantialvariationininationoverthisperiod,wendlittle evidenceofanimpactofthelevelofinationonvariabilityofsectoraloutputgrowth.Our resultsindicatethattheoilprice,andtherealexchangeratearesignicantlycorrelated withthevariabilityofoutputgrowthacrosssectors. 
Keywords: 
Ination,outputvariability,Canada. 
JELClassicationNumber: 
E31,E52. 
 
ANoteontheLinkBetweenInationand OutputVariabilityinCanada 
Talan _ IscanLarsOsberg 
1 
Revision:September16,1997 DepartmentofEconomics DalhousieUniversity Halifax,NovaScotia,B3H3J5,Canada 
1 
Wewouldliketothanktheeditor,twoanonymousreferees,SeamusHogan,andKuanXu fortheircomments,andtheSocialSciencesandHumanitiesResearchCouncilofCanadaunder grant410-93-0557toOsbergfornancialsupport.LynnLethbridgeprovidedexcellentresearch assistance.Allremainingerrorsareoursalone. 
 
1Introduction 
Economistshaveoftenarguedthatinationreducestheinformationalcontentofrelative pricesandtherebyhinderstheecientallocationofresources.Manyauthors,suchas Lucas1973,havesuggestedthatahigherinationratemeansthatproducersndit morediculttodistinguishbetweenrealandnominalshocks,andthatbecauserelative pricechangesbecomeconfoundedwithination,theeciencyofthepricemechanismin allocatingresourcesisimpeded. 
1 
Asubstantialliteraturehasgrownoutofthesemodels, andinvestigatedtherelationshipbetweenrelativepricevariabilityandination. 
2 
Most studieshavefoundapositiveassociationbetweenpricevariabilityandination,which hasbeeninterpretedassupportiveofthepredictionsofthetheoreticalmodels. Recently,Parsley1996hasexaminedthisissueusinganoveldatasetfrom48U.S. cities.Hisresultsconrmtheexistenceofapositiveassociationbetweeninationandrel- ativepricevariability.However,theeectofinationonrelativepricevariabilityissmall anddampsoutquickly.Thesendings,ashepointsout,challengethetraditionalview thatination,throughitseectonrelativeprices,hasasignicantimpactoneconomic welfare. 
3 
Althoughexistingstudieshavefocusedontherelationshipbetweeninationandrel- ativeprices,ultimately, 
output 
iswhatmattersforindividualutilityandsocialwelfare. Howmuchofanimpactdoesinationhaveonthereallocationofresourcesacrosssec- tors?Giventhattheoutputeectsofinationarewhatmatterforeconomicwelfare, theempiricalinvestigationofthelinkbetweeninationandsectoraloutputvariabilityis highlyneglectedintheliterature. 
4 
If,bydistortingrelativepricesignals,inationaectssectoraloutputvariability,its welfareconsequencescouldbequitesubstantial,duetocostsofadjustment.Forinstance, thehiringandringoflaborofteninvolvescostsofattrition,andtrainingandrecruit- mentcoststhatareproportionaltolayosandhires.Aswell,installingnewplantsand closingoldplantstypicallyentailscostsofadjustment.Haltingoperationsmayalsobe costly,becauseproducersmayrisklosingintangibleassetse.g.,areputationforreliabil- ity,andorestablishedmarketinganddistributionchannels.Fromasocialstandpoint, therefore,theremaybesignicantsavingsassociatedwithreducingexcessvolatilityin production.Fromanindividualproducer'sstandpoint,balancedgrowthintheeconomy 1 
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