A Monetary Explanation Of The Great Stagflation Of The 1970s

Robert Barsky and Lutz Kilian

No 2389, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The origins of stagflation and the possibility of its recurrence continue to be an important concern among policymakers and in the popular press. It is common to associate the origins of the Great Stagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This paper argues that oil price increases were not nearly as essential a part of the causal mechanism generating stagflation as is often thought. We provide a model that can explain the bulk of stagflation by monetary expansions and contractions without reference to supply shocks. Monetary fluctuations also help to explain variations in the price of oil (and other commodities) and help to account for the striking coincidence of major oil price increases and worsening stagflation. In contrast, there is no theoretical presumption that oil supply shocks are stagflationary. In particular, we show that oil supply shocks may quite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocks actually raised the deflator (as opposed to the CPI). The oil supply shock view also fails to explain the dramatic surge in the price of other industrial commodities that preceded the 1973/74 oil price increase and the fact that increases in industrial commodity prices lead oil price increases in the OPEC period.

Keywords: Commodity prices; Monetary policy; Oil market; Stagflation (search for similar items in EconPapers)
JEL-codes: E31 E32 E40 (search for similar items in EconPapers)
Date: 2000-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: A Monetary Explanation of the Great Stagflation of the 1970s (2000)
Working Paper: A Monetary Explanation of the Great Stagflation of the 1970s (2000)
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