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Supply vs. Demand Approaches to the Problem of Stagflation

Listed author(s):
  • Michael Bruno
  • Jeffrey Sachs
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    We develop a model of aggregate supply and demand in the open economy to explain the important characteristics of international macroeconomic adjustment in the 1970s. Traditional demand-oriented models cannot account for the worldwide phenomenon of rising inflation and unemployment in the mid-70s, or for the failure of most industrialized economies to recover from the deep recession of 1974-75. When aggregate supply is carefully treated, it is found that much of the inflation and sluggish output performance may be attributed to the jump in the real costs of intermediate inputs and the failure of real wages to adjust downward after the input price shock. A simulation model shows that fuel inputs are sufficiently important in production that a large part of the worldwide recession may be attributed to the change in the relative price of oil, since 1973. In an empirical section, it is suggested that countries differ in their response to supply shocks and macro-policies because of differences in key structural relationships, particularly in wage determination.

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    File URL: http://www.nber.org/papers/w0382.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0382.

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    Date of creation: Aug 1979
    Publication status: published as H. Giersch (ed.), Macroeconomic Policies for Growth and Stability,(Kiel: Institut fur Weltwirtschaft, 1981
    Handle: RePEc:nbr:nberwo:0382
    Note: ITI IFM
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    1. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
    2. Bruno, Michael, 1978. "Exchange Rates, Import Costs, and Wage-Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 379-403, June.
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