ABSTRACT
However, in the 1970s, the inadequacy of these Keynesian models to deal with the large structural changes linked to the oil crises shook the trust of policy makers in these models. The increase in oil prices lead to double-digit inflation and rising unemployment and that clearly shook the confidence of the belief in the traditional Keynesian trade-off between inflation and unemployment. In a critical evaluation of the existing type of modelling, Lucas (1976) argued that conventional macroeconometric large-scale models were fatally flawed and were not useful for the policy debate. Economists and policy makers turned their heads to the supply side. It was realized that structures that were developed were far from ideal and blocked a continuation of a high growth path. Gradually, also by model builders, more emphasis was put on endogenizing the supply side of the economy. For example, it was demonstrated that a rise in real wages exceeding the rate of technical progress would increase unemployment. In the Netherlands this model extension has been very important for the acceptance of the policy of wage restraint (e.g. Den Butter, 1991).
