This book sets forth both a theory and a comparative empirical analysis of stagflation, that peculiar combination of high unemployment, slow growth, and spurts of high inflation bedeviling the advanced industrial nations during the past fifteen years.

The authors first construct a small macroeconomic model that takes full account of aggregate demand and supply forces in the determination of output, employment, and the price level, in both a single-economy and a multi-economy setting. They then apply the model to provide an understanding of comparative performance of industrial countries in the areas of unemployment, inflation, productivity, and investment growth. They argue convincingly that the decay of the major economies during this period resulted from the supply shocks of the 1970s, such as the two major OPEC oil-price increases, and from the consequent policy-induced decrease in demand in response to inflationary pressures. Their analysis differs markedly from similar studies in that it takes specific account of institutional differences in the labor markets of the various economies. This helps to explain in particular the divergent adjustment profiles of the United States and Europe.

Bruno and Sachs make several key recommendations for the mix of demand management and incomes policies necessary to combat stagflation in individual countries as well as for the coordination of macroeconomic policies among the major industrial nations.

This book considers the phenomenon of the high inflation and negative growth experience processes of the 1970s and 1980. It draws substantially on Bruno's experience in Israel, but also ranges through the past and present experience in Latin America (Argentina, Bolivia, Brazil, Chile, and Mexico) and considers the more recent experience of East European economies. The author looks into the common characteristics of such experiences and their possible curesDSwith some emphasis on the lessons of the Israeli experience in respect of the role of incomes policy and the political economy of stabilization.

The discussion of the theoretical underpinnings of stabilization programmes provides an opportunity to blend of a number of disciplines: lessons of economic history, open economy monetary and macro theory, game-theoretic applications to the theory of economic policy design (concepts such as dynamic inconsistency, government reputation, and credibility), and the rationalization of incomes policy.