On Monday I evaluated a detail from something that Roger Farmer said. I looked up the PDF Monetary Policy Rules and Macroeconomic Stability: Evidence And Some Theory by Richard Clarida, Jordi Gali, and Mark Gertler.
While reading thru that paper, what I read of it, I came across something that absolutely bears repeating. This begins on page 166 of the PDF (page 20 of 34 in the PDF reader):
At a minimum, the notion that the oil shocks can largely account for the volatile behavior in output during the 1970s period is open to debate...
While there is room to debate the importance of the oil shocks for real activity over this period, the case that these shocks alone account for the sustained high inflation is completely unpersuasive. Note first that the Hamilton evidence is silent on the link between the oil shocks and inflation. On the other hand, as De Long {1997} emphasizes, timing considerations make the oil shocks suspect as the leading explanation for inflation over this period. Figure III illustrates this point. The figure shows three-quarter centered moving averages of the real oil price against inflation over the period 1960:1–1997:1.
As De Long argues, the initial build-up of inflation in the late 1960s and early 1970s occurs prior to the first oil shock. Indeed, until the time of the first oil shock in 1974, the real oil price is steadily declining, while inflation is steadily rising. The real oil price then remains constant until late 1979, the period of the second major oil shock. Note again that there is a steady rise in inflation over a three-year period prior to this shock. In turn, the decline in inflation in the early 1980s appears to lead the decline in the real oil price.
While there is room to debate the importance of the oil shocks for real activity over this period, the case that these shocks alone account for the sustained high inflation is completely unpersuasive. Note first that the Hamilton evidence is silent on the link between the oil shocks and inflation. On the other hand, as De Long {1997} emphasizes, timing considerations make the oil shocks suspect as the leading explanation for inflation over this period. Figure III illustrates this point. The figure shows three-quarter centered moving averages of the real oil price against inflation over the period 1960:1–1997:1.
As De Long argues, the initial build-up of inflation in the late 1960s and early 1970s occurs prior to the first oil shock. Indeed, until the time of the first oil shock in 1974, the real oil price is steadily declining, while inflation is steadily rising. The real oil price then remains constant until late 1979, the period of the second major oil shock. Note again that there is a steady rise in inflation over a three-year period prior to this shock. In turn, the decline in inflation in the early 1980s appears to lead the decline in the real oil price.
Once inflation got going, of course the rising price of oil became a major contributor. That's not the point.
It wasn't the rising price of oil that got inflation going. That's the point.
If it wasn't oil, it was something else that got inflation going. That's why this matters.
What was it? That's the question.
It was the rising cost of finance. That's my answer.
See?
1 comment:
John Taylor:
"Recall that in the 1970s we had several large oil shocks...
But ... the poor economic performance, along with the higher inflation, that we experienced in the 1970s really got started before the oil shocks began."
Inflation first, oil shocks later.
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