The Swedish Economy in the 1970's: The Lessons of Accommodative Policies

Abstract

It is agreed among economists that, in the absence of any policy response, an oil price shock in an oil-importing country will produce a (presumably) temporaru increase in both inflation and unemployment. Freeman, Johnson, Blinder, Branco-Sachs, Buiter, Gordon, Phelps, and others have put forth models in which such a stagflationary response results from higher oil prices. Rather than a mere happenstance, the promulgaion of these models was attributable to the macreconomic events which took place in most oil-importing countries following teh large oil prices hikes of the 1970s. Economists were quick to point out that an oil price shock presents policy makers with a choice, to wit, whether to accomadate the shocks or to keep policy constant in the face of the stagflationary response. Those who endorsed the existence of a short-run trade-off between inflation and unemployment typically favored some type of accommodation, while those who denied the existence of a stable, short-run trade-off argued against accomodation.