Supply vs. Demand Approaches to the Problem of Stagflation

68 Pages Posted: 4 Jul 2004 Last revised: 20 Jul 2022

See all articles by Michael Bruno

Michael Bruno

Hebrew University (Deceased)

Jeffrey D. Sachs

Columbia University - Columbia Earth Institute; National Bureau of Economic Research (NBER)

Date Written: August 1979

Abstract

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.

Suggested Citation

Bruno, Michael and Sachs, Jeffrey D., Supply vs. Demand Approaches to the Problem of Stagflation (August 1979). NBER Working Paper No. w0382, Available at SSRN: https://ssrn.com/abstract=261235

Michael Bruno

Hebrew University (Deceased)

Jeffrey D. Sachs (Contact Author)

Columbia University - Columbia Earth Institute ( email )

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