IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v74y1984i2p38-43.html

Supply Shocks and Monetary Policy Revisited

Author

Listed:
  • Gordon, Robert J

Abstract

This paper reviews the main issues that supply shocks pose for the conduct of monetary policy. A simple version of the Gordon-Phelps model shows that the necessary condition for actual real GNP to be maintained at its equilibrium level in the wake of a supply shock is for the change innominal GNP to exceed the change in the nominal wage by the change in the income share of the raw material in GNP. The required "wedge" between nominal GNP and wage growth can be accomplished by any combination of monetary accommodation and nominal wage flexibility. Without this combination a "macroeconomic externality" occurs, with real CNP falling below its equilibrium level. The obstacles to monetary accommodation are examined in terms of a taxonomic wage adjustment equation that allows for differing responses to current inflation, lagged inflation, and lagged wage change. Monetary accommodation is infeasible when there is full indexation to current inflation and creates a permanent acceleration of inflation following a one-time permanent shock when there is indexation to lagged inflation. With "forward-looking" expectation formation in the sense of Taylor, a supply shock is likely to cause changes in parameters of the wage adjustment equation as workers attempt to avoid the macroeconomic externality. The final section of the paper discusses doctrinal debates that originated in part from the empirical failures of earlier Phillips curves that neglected supply shocks.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Gordon, Robert J, 1984. "Supply Shocks and Monetary Policy Revisited," American Economic Review, American Economic Association, vol. 74(2), pages 38-43, May.
    • Handle: RePEc:aea:aecrev:v:74:y:1984:i:2:p:38-43
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0002-8282%28198405%2974%3A2%3C38%3ASSAMPR%3E2.0.CO%3B2-N&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bennett T. McCallum, 1984. "Credibility and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 105-135.
    2. Turnovsky, Stephen J, 1987. "Supply Shocks and Optimal Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 20-37, March.
    3. Aurélien Goutsmedt, 2016. "The New Classical Explanation of the Stagflation: A Psychological Way of Thinking," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01281962, HAL.
    4. Lorde, Troy & Jackman, Mahalia & Thomas, Chrystol, 2009. "The macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago," Energy Policy, Elsevier, vol. 37(7), pages 2708-2716, July.
    5. Toptancı, Ali İskan, 2021. "The Effects of Oil Price Shock on the World Economy: A Macroeconomic Analysis," EconStor Research Reports 231406, ZBW - Leibniz Information Centre for Economics.
    6. Robert J. Gordon, 2011. "The History of the Phillips Curve: Consensus and Bifurcation," Economica, London School of Economics and Political Science, vol. 78(309), pages 10-50, January.
    7. Reicher Christopher Phillip & Utlaut Johannes Friederich, 2013. "Monetary policy shocks and real commodity prices," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 715-749, October.
    8. Charles Freedman, 1990. "La politique monétaire des années 90 : leçons et enjeux," L'Actualité Economique, Société Canadienne de Science Economique, vol. 66(2), pages 147-186.
    9. Robert Barsky & Lutz Kilian, 2000. "A Monetary Explanation of the Great Stagflation of the 1970s," NBER Working Papers 7547, National Bureau of Economic Research, Inc.
    10. Philippe Burger, 2025. "Twenty-five years of inflation targeting in South Africa: Going from 6% to 3%," WIDER Working Paper Series wp-2025-42, World Institute for Development Economic Research (UNU-WIDER).
    11. Ghanem Darine, 2012. "Fixed Exchange Rate Regimes and Inflation Performance: Evidence from MENA Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-30, August.
    12. Piero Bini, 2013. "The Italian Economists and the Crisis of the Nineteenseventies. The Rise and Fall of the "Conflict Paradigm"," HISTORY OF ECONOMIC THOUGHT AND POLICY, FrancoAngeli Editore, vol. 2013(1), pages 73-101.
    13. Timothy J. Considine, 1988. "Oil Price Volatility And U.S. Macroeconomic Performance," Contemporary Economic Policy, Western Economic Association International, vol. 6(3), pages 83-96, July.
    14. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    15. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
    16. Mutascu, Mihai, 2019. "Phillips curve in US: New insights in time and frequency," Research in Economics, Elsevier, vol. 73(1), pages 85-96.
    17. Priyanshi Gupta & Anurag Goyal, 2015. "Impact of oil price fluctuations on Indian economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 39(2), pages 141-161, June.
    18. Roy, Arup, 2024. "Impacts of economic development, globalization, and gross capital formation on natural resources rents: Evidence from India," Resources Policy, Elsevier, vol. 97(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:74:y:1984:i:2:p:38-43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.