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Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative

In: NBER Macroeconomics Annual 2001, Volume 16

  • Robert B. Barsky
  • Lutz Kilian

This paper argues that major oil price increases were not nearly as essential a part of the causal mechanism that generated the stagflation of the 1970s as is often thought. There is neither a theoretical presumption that oil supply shocks are stagflationary nor robust empirical evidence for this view. In contrast, we show that monetary expansions and contractions can generate stagflation of realistic magnitude even in the absence of supply shocks. Furthermore, monetary fluctuations help to explain the historical movements of the prices of oil and other commodities, including the surge in the prices of industrial commodities that preceded the 1973/74 oil price increase. Thus, they can account for the striking coincidence of major oil price increases and worsening stagflation.

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This chapter was published in:
  • Ben S. Bernanke & Kenneth Rogoff, 2002. "NBER Macroeconomics Annual 2001, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number bern02-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11065.
    Handle: RePEc:nbr:nberch:11065
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