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Supply Shocks, Wage Stickiness, and Accommodation

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  • Fischer, Stanley

Abstract

The main issue discussed in the supply shock literature that followed the oil and food price shocks of the seventies was whether to accommodate. The supply shock reduces the equilibrium level of output, and monetary policy can not affect that. But in the seventies supply shocks were also followed by recessions. The question is whether monetary policy can and should be used to prevent such recessions. The paper analyzes the conditions underwhich a suppiy shock will result in recession, and the potential for monetary policy to offset the fall in output. The basic result is that a pure supply shock need not resultin a recession if the money stock is held constant.Aggregate demand effects associated with the supply shock--including the effectsof monetary policy attempts to fight the inflation caused by the supply shock--may cause a recession, as also may real wage resistance by workers. The choice of policy response to the supply shock then turns on the same basic issues as counter-cyclical policy in general, particularly the relative costs of inflation and unemployment.
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Suggested Citation

  • Fischer, Stanley, 1985. "Supply Shocks, Wage Stickiness, and Accommodation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 1-15, February.
    • Handle: RePEc:mcb:jmoncb:v:17:y:1985:i:1:p:1-15
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    Cited by:

    1. Lee, Chien-Chiang & Olasehinde-Williams, Godwin & Özkan, Oktay, 2023. "Geopolitical oil price uncertainty transmission into core inflation: Evidence from two of the biggest global players," Energy Economics, Elsevier, vol. 126(C).
    2. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
    3. Robert Rennhack, 1991. "La Conducción de la Política Monetaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(83), pages 11-20.
    4. Serra, Teresa & Gil, José M., 2012. "Biodiesel as a motor fuel price stabilization mechanism," Energy Policy, Elsevier, vol. 50(C), pages 689-698.
    5. Omotosho, Babatunde Samson, 2022. "Oil price shocks and monetary policy in resource-rich economies: Does capital matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    6. Muhammad Zeshan & Wasim Shahid Malik & Muhammad Nasir, 2019. "Oil Price Shocks, Systematic Monetary Policy and Economic Activity," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 65-81.
    7. Pikoulakis, E. V. & Evans, William, 1998. "Staggering, the optimal monetary rule and persistence," Economics Letters, Elsevier, vol. 59(1), pages 91-95, April.
    8. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers 1998:3, Lund University, Department of Economics, revised 21 Apr 1999.
    9. Thomas M. Humphrey, 1990. "Ricardo versus Thornton on the appropriate monetary response to supply shocks," Economic Review, Federal Reserve Bank of Richmond, vol. 76(Nov), pages 18-24.

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