This article proposes a history of the evolution of macroeconomists’ explanations of the 1970s US stagflation, from 1975 to 2013. Using qualitative and quantitative methods, 1) I observe the different types of explanations coexisting at different periods ; 2) I assess which was the dominant type of explanations for each period ; and 3) I identify the main sources of influence for the different types of explanation. In the late 1970s and early 1980s, supply-shocks and inflation inertia were fundamental concepts to explain stagflation. The interest on this topic progressively vanished after 1985. In the 1990s, it was a totally new literature which emerged almost without any reference to past explanations. This literature focused on the role played by monetary policy in the late 1960s and the 1970s to account for the rise of inflation. New Classical economists’ contributions, like Lucas (1976), Kydland and Prescott (1977) or Barro and Gordon (1983a), which were ignored by stagflation explanations in the 1970s/1980s, became major references to account for the 1970s stagflation in the 1990s.
This article studies the dissemination of the Natural Rate of Unemployment Hypothesis (NRH) in macroeconomics during the 1970s, by studying the reaction of Robert J. Gordon to the argument of Friedman (1968). In the early 1970s, Gordon opposed the NRH, arguing that the estimated parameter on expected inflation was below one. Confronting to new data and to rising inflation, Gordon adopted the NRH after 1973. Nevertheless, the adoption anticipated any clear empirical proof. We explain that this conversion was due to Friedman’s influence on Gordon, but also to the fact it did not prevent Gordon to support active stabilization policies.
The article shows that Sargent’s macroeconomic vision differs from Lucas' one. For the latter, the assumptions of a model are “un-realistic”, i.e., the model does not aim to represent reality. It is a simulation tool that allows the assessment of different economic policies. The “Lucasian” ideal is a macroeconomist, who is therefore destined to become an engineer in charge of providing public authorities with an “economic policy software”. The engineer uses this software to guide policymakers on a scientific basis. For its part, Sargent considers that in order to substitute the Keynesian paradigm, the new classical economics must be able to fulfill the same tasks. And one of these tasks is to advise public authorities by providing them with an interpretative framework for the economic and social phenomena and with intuitive tools to discuss the economic policies that will be set up. Sargent wants to apply what he calls the Rational Expectations Theory to a set of concrete events (Poincaré stabilization, German hyperinflation, Thatcher and Reagan policies) in order to demonstrate the relevance of this interpretative framework used to think about contemporary economic problems.