Working Paper: NBER ID: w14563
Authors: Alan S. Blinder; Jeremy B. Rudd
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: stagflation; supply shock; inflation; monetary policy
JEL Codes: E3; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply shocks (E39) | inflation (E31) |
| rising food prices (Q11) | inflation (E31) |
| rising energy prices (Q41) | inflation (E31) |
| end of price controls (E64) | inflation (E31) |
| absence of shocks (D52) | deceleration of inflation (E31) |
| food sector shocks (Q11) | inflation in 1978 (E31) |
| energy prices (Q41) | inflation in 1979 (E31) |
| structural changes (L16) | diminished impacts of oil shocks (F69) |