Working Paper: CEPR ID: DP6937
Authors: Natalie Chen; Liam Graham; Andrew J. Oswald
Abstract: Nearly all post-war recessions were preceded by oil-price shocks, but is this because spikes in the price of oil cause economic downturns? At the heart of this question lies an identification problem: oil prices and the state of the world economy are endogenously determined. This paper uses terrorist incidents as an instrumental variable. In an international panel of industries, we show that, after correction for simultaneity bias -- though not before -- the price of oil has large negative effects upon profitability. We test for weak instruments and check sub-sample robustness. Our findings seem to lend support to the claim that oil-price spikes can be a source of recessions.
Keywords: energy prices; industries; oil shocks; profitability
JEL Codes: E3; L6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Terrorist incidents (H84) | Oil prices (L71) |
| Oil prices (L71) | Profitability (L21) |
| Terrorist incidents (H84) | Profitability (L21) |
| Oil price spikes (Q31) | Profitability (L21) |
| Oil price shocks (Q43) | Economic downturns (E32) |