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

52 Pages Posted: 20 Jul 2001 Last revised: 27 Jul 2001

See all articles by Robert Barsky

Robert Barsky

Research Department, Federal Reserve Bank of Chicago; University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2001

Abstract

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.

Suggested Citation

Barsky, Robert B. and Kilian, Lutz, Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative (July 2001). NBER Working Paper No. w8389. Available at SSRN: https://ssrn.com/abstract=277299

Robert B. Barsky (Contact Author)

Research Department, Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-9476 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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