This paper aims to explain the differences in macroeconomic performance between Japan and West Germany with respect to disinflating and stabilizing the economy after the two oil price shocks. The main causal factors derived are differences (a) in the timing of the disinflation policies, and (b) in labor market flexibility. Besides, there were also other factors, such as demographic, structural and external ones, which have played a role. The author argues that the macro-costs of shock absorption could have been reduced in both countries by implementing some institutional supplements, such as wage indexation or (tax-based) incomes policy.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.