TY  - JOUR
AU  - Blinder, Alan S
AU  - Rudd, Jeremy B
TI  - The Supply-Shock Explanation of the Great Stagflation Revisited
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14563
PY  - 2008
Y2  - December 2008
DO  - 10.3386/w14563
UR  - http://www.nber.org/papers/w14563
L1  - http://www.nber.org/papers/w14563.pdf
N1  - Author contact info:
Alan S. Blinder
Department of Economics
Princeton University
Princeton, NJ 08544-1021
Tel: 609/258-3358
Fax: 609/258-5398
E-Mail: blinder@princeton.edu

Jeremy Rudd
Board of Governors of the
Federal Reserve System
20th and C Streets NW, Stop 61
Washington, DC 20551
E-Mail: jeremy.rudd@frb.gov
M1  - published as Alan S. Blinder, Jeremy B. Rudd. "The Supply-Shock Explanation of the Great Stagflation Revisited," in Michael D. Bordo and Athanasios Orphanides, editors, "The Great Inflation: The Rebirth of Modern Central Banking" University of Chicago Press (2013)

AB  - 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.
ER  -