The Role of Oil Price Shocks in Causing U.S. Recessions

By Lutz Kilian, Robert J. Vigfusson. Social Science Research Network, 2014

164 citations recorded by the source corpus.

Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/2a23875524411041768ace4bdd79be77471c3c16

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In Economics and Econometrics

Citations in the corpus

Forecasting and Stress Testing with Quantile Vector Autoregression (2019, background): “There is, however, substantial empirical evidence that macroeconomic variables are characterised by nonlinearities and asymmetries which cannot be captured by simple linear Gaussian models (Perez-Quiros and Timmermann 2000, Hubrich and Tetlow 2015, Kilian and Vigfusson 2017, Adrian, Boyarchenko and ”