Supply Shocks and Monetary Policy Revisited
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.
|Date of creation:||Mar 1984|
|Publication status:||published as Gordon, Robert J. "Supply Shocks and Monetary Policy Revisted." American Economic Review, Vol. 74, No. 2, (May 1984), pp. 38-43.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1980. "Stagflation, persistent unemployment and the permanence of economic shocks," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 467-492, October.
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
- Phelps, Edmund S, 1978. "Commodity-Supply Shock and Full-Employment Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 206-221, May.
- Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
- Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages -.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1301. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.