THE ECONOMICS OF WORLDWIDE STAGFLATION: A REVIEW *

Abstract

THIS is not an easy book. Roughly half of it is devoted to a very thorough exposition of the macroeconomic theory of an economy with an imported intermediate product (energy). This clearly introduces the possibility of an exogenous supply shock if the terms on which energy can be bought shift. This section ends with some simulation exercises on a complete general equilibrium dynamic model of 35 equations. Thus when one turns to the empirical work in the second half of the book, which relates to the experience of oil importing countries over the last two decades, one has two expectations: that the estimated models will be complete simultaneous systems, and that the oil price will play a key role. Both expectations are disappointed. The main focus is not on the energy market but on the labour market, where the key contribution is in the use made of a notion of a real wage gap in the modelling of industrial country price and output dynamics. The real wage gap is the proportion by which real wage rates exceed their full employment equilibrium value. This modelling is not done in a consistent simultaneous structural framework, indeed it is not only rather scrappy in theoretical terms but also econometrically unsophisticated. The link between these two sections might be found in the determination of real wage gaps by energy price changes. They do indeed have a role to play but other factors can also generate gaps; thus the authors see the spontaneous European wage explosion of the late 1960's as opening up a gap, and likewise the widespread increase in payroll taxes. Another possible contributor is a productivity slowdown not reflected in wage trends; this is recognised, but is treated as being in large part endogenous. The authors' purpose is not to displace Keynesian demand considerations by a variant on new classical rational-expectations supply-side models, but to try to synthesise demand and supply factors in a model with alternative regimes the demarcation of which is blurred by aggregation. This is a very worthy task on which they have made considerable advances, although their particular mixture of rigorous theoretical and relatively casual empirical argument will not be to everyone's taste. With Keynesian features to support policy effectiveness the question of international co-operation arises naturally in the context of an open economy model and a comparative study. The case for co-operation is strong, but is complicated by the recognition that economies differ in ways which significantly affect not only their responses to their own policies, but