Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative

Robert Barsky and Lutz Kilian

No 8389, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that major oil price increases were not nearly as essential a part of the causal mechanism that generated the stagflation of the 1970s as is often thought. There is neither a theoretical presumption that oil supply shocks are stagflationary nor robust empirical evidence for this view. In contrast, we show that monetary expansions and contractions can generate stagflation of realistic magnitude even in the absence of supply shocks. Furthermore, monetary fluctuations help to explain the historical movements of the prices of oil and other commodities, including the surge in the prices of industrial commodities that preceded the 1973/74 oil price increase. Thus, they can account for the striking coincidence of major oil price increases and worsening stagflation.

Date: 2001-07
New Economics Papers: this item is included in nep-ene and nep-pke
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Published as Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative , Robert B. Barsky, Lutz Kilian. in NBER Macroeconomics Annual 2001, Volume 16 , Bernanke and Rogoff. 2002
Published as Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER/Macroeconomics Annual, vol 16(1), pages 137-183.

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