Robert B. Barsky

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

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 1973-1974 oil price increase. Thus, they can account for the striking coincidence of major oil price increases and worsening stagflation.

Why Does the Stock Market Fluctuate

Large long-run swings in the United States stock market over the past century correspond to swings in estimates of fundamental values calculated by using a long moving average of past dividend growth to forecast future growth rates. Such a procedure would have been reasonable if investors were uncertain of the structure of the economy. and had to make forecasts of unknown and possibly-changing long-run dividend growth rates. The parameters of the stochastic process followed by dividends over the twentieth century cannot be precisely estimated even today at the centurys end. Investors in the past had even less information about the dividend process. In such a context, it is difficult to see how investors can be faulted for implicitly forecasting future dividends by extrapolating past dividend growth.

Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard

We examine interest and inflation rates from 1879 to 1913. Deflation prior to 1896 was followed by inflation. Average U. S. inflation was 3.1 percentage points higher in the years after 1896, yet nominal interest rates were no higher after 1896. This nonadjustment of nominal rates would be consistent with rational expectations if inflation was not forecastable, and indeed univariate tests show little sign of serial correlation. But gold production does forecast inflation. The relationship between mining and inflation was such that expected inflation should have risen 300 basis points between 1890 and 1910. We consider explanations of this failure to foresee the shift in inflation after 1896 and conclude that it is not persuasive evidence that investors ignored relevant information, but does suggest great uncertainty about the appropriate model for analyzing the economy.

Whither News Shocks

Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where “news” is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent – possibly lending some support to the hypothesis of news-driven business cycles – or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.

Bubbles and Leverage: A Simple and Unified Approach

In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary policy.