Stabilization Policies in the World Economy: Scope and Skepticism

Throughout the industrialized world, macroeconomic performance since the mid-1970s has been very poor, and the prospects in the near term remain bleak. While there is no consensus among macroeconomists regarding the diagnosis (or cure) of these ills, the major competing schools of thought have focused most of their blame on macroeconomic policy. This paper summarizes a series of studies, in collaboration with Michael Bruno, suggesting rather that supply shocks coupled with real wage rigidities are a central source of the poor macroeconomic performance. Various hypotheses are mentioned as a source for the resistance to real wage cuts, and some illustrations of the policy implications of supply shocks are provided.