The Supply Shock Explanation of the Great Stagflation Revisited

Alan Blinder and Jeremy Rudd
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Jeremy Rudd: Federal Reserve Board

No 1097, Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

Abstract: U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980. The well-known supply-shock explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls. Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation. This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes. Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s.

Keywords: United; States (search for similar items in EconPapers)
JEL-codes: E23 E24 E31 E32 E64 Q35 Q41 (search for similar items in EconPapers)
Date: 2008-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Related works:
Chapter: The Supply-Shock Explanation of the Great Stagflation Revisited (2013)
Working Paper: The Supply-Shock Explanation of the Great Stagflation Revisited (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:cepsud:176

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