Academic Commons

Reports

Supply vs. Demand Approaches to the Problem of Stagflation

Bruno, Michael; Sachs, Jeffrey D.

We develop a model of aggregate supply and demand in the open economy to explain the important characteristics of international macroeconomic adjustment in the 1970s. Traditional demand-oriented models cannot account for the worldwide phenomenon of rising inflation and unemployment in the mid-70s, or for the failure of most industrialized economies to recover from the deep recession of 1974-75. When aggregate supply is carefully treated, it is found that much of the inflation and sluggish output performance may be attributed to the jump in the real costs of intermediate inputs and the failure of real wages to adjust downward after the input price shock. A simulation model shows that fuel inputs are sufficiently important in production that a large part of the worldwide recession may be attributed to the change in the relative price of oil, since 1973. In an empirical section, it is suggested that countries differ in their response to supply shocks and macro-policies because of differences in key structural relationships, particularly in wage determination.

Files

More About This Work

Academic Units
Earth Institute
Publisher
National Bureau of Economic Research
Series
NBER Working Paper, 382
Published Here
September 28, 2009

Notes

Published as part of Macroeconomic Policies for Growth and Stability (Kiel: Institut für Weltwirtschaft, 1981).

Academic Commons provides global access to research and scholarship produced at Columbia University, Barnard College, Teachers College, Union Theological Seminary and Jewish Theological Seminary. Academic Commons is managed by the Columbia University Libraries.