The correlation between oil shocks and economic recessions appears to be too strong to be just a coincidence And although demand pressure associated with the later stages of a business cycle expansion seems to have been a contributing factor in a number of these episodes, statistically one cannot predict the oil price changes prior to 1973 on the basis of prior developments in the U.S. economy. Moreover, supply disruptions arising from dramatic geopolitical events are prominent causes of a number of the most important episodes. Insofar as events such as the Suez Crisis and first Persian Gulf War were not caused by U.S. business cycle dynamics, a correlation between these events and subsequent economic downturns should be viewed as causal. This is not to claim that the oil price increases themselves were the sole cause of most postwar recessions. Instead the indicated conclusion is that oil shocks were a contributing factor in at least some postwar recessions.Hat tip: Calculated Risk
January 15, 2011
Oil Price Shocks and Economic Recessions
Jim Hamilton of Econobrowser has a new paper on oil price shocks and post-World War II recessions, in which he argues that "Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession."