TY  - JOUR
AU  - Barsky,Robert
AU  - Kilian,Lutz
TI  - A Monetary Explanation of the Great Stagflation of the 1970s
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7547
PY  - 2000
Y2  - February 2000
UR  - http://www.nber.org/papers/w7547
L1  - http://www.nber.org/papers/w7547.pdf
N1  - Author contact info:
Robert B. Barsky
Department of Economics
University of Michigan
Ann Arbor, MI  48109-1220
Tel: 734/764-9476
Fax: 734/764-2769
E-Mail: barsky@umich.edu

Lutz Kilian
Dept.of Economics
University of Michigan
Ann Arbor,  MI 48109-1220
E-Mail: lkilian@umich.edu
AB  - 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.
ER  -