There continues to be considerable interest, both among policymakers
and in the popular press, in the origins of stagflation and the possibility
of its recurrence. The traditional explanation of the stagflation of the
1970s found in intermediate textbooks is an adverse shift in the aggregate
supply curve that lowers output and raises prices on impact.1 Indeed, it is
hard to see in such a static framework how a shift in aggregate demand
could have induced anything but a move of output and prices in the
same direction. This fact has lent credence to the popular view that
exogenous oil supply shocks in 1973-1974 and 1978-1979 were primarily
responsible for the unique experience of the 1970s and early 1980s. For
example, T