Working Paper: CEPR ID: DP4496
Authors: Robert Barsky; Lutz Kilian
Abstract: Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth. In this Paper, we review the arguments supporting such views. First, we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining macroeconomic fluctuations, and we trace how the arguments of proponents of the oil view have evolved in response to these difficulties. Second, we challenge the notion that at least the major oil price movements can be viewed as exogenous with respect to the US macroeconomy. We examine critically the evidence that has led many economists to ascribe a central role to exogenous political events in modelling the oil market, and we provide arguments in favour of ?reverse causality? from macroeconomic variables to oil prices. Third, although none of the more recent oil price shocks has been associated with stagflation in the US economy, a major reason for the continued popularity of the oil shock hypothesis has been the perception that only oil price shocks are able to explain the US stagflation of the 1970s. We show that this is not the case.
Keywords: oil shock; OPEC; recession; stagflation
JEL Codes: E31; E32; Q31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| oil price shocks (Q43) | recessions (E32) |
| oil price shocks (Q43) | excessive inflation (E31) |
| oil price shocks (Q43) | reduced productivity (O49) |
| oil price shocks (Q43) | lower economic growth (F62) |
| macroeconomic variables (E19) | oil prices (L71) |
| oil price increases (Q31) | recessions (E32) |
| oil price shocks (Q43) | productivity slowdown in the 1970s (O49) |