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Oil and the U.S. macroeconomy: an update and a simple forecasting exercise

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  • Kevin L. Kliesen

Abstract

Some analysts and economists recently warned that the U.S. economy faces a much higher risk of recession should the price of oil rise to $100 per barrel or more. In February 2008, spot crude oil prices closed above $100 per barrel for the first time ever, and since then they have climbed even higher. Meanwhile, according to some surveys of economists, it is highly probable that a recession began in the United States in late 2007 or early 2008. Although the findings in this paper are consistent with the view that the U.S. economy has become much less sensitive to large changes in oil prices, a simple forecasting exercise using Hamilton's model augmented with the first principal component of 85 macroeconomic variables reveals that a permanent increase in the price of crude oil to $150 per barrel by the end of 2008 could have a significant negative effect on the growth rate of real gross domestic product in the short run. Moreover, the model also predicts that such an increase in oil prices would produce much higher overall and core inflation rates in 2009 than most policymakers expect.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2008)
Issue (Month): Sep ()
Pages: 505-516

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Handle: RePEc:fip:fedlrv:y:2008:i:sep:p:505-516:n:v.90no.5

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Keywords: Petroleum products - Prices ; Economic conditions;

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References

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  1. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
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Citations

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Cited by:
  1. Jamie Emerson, 2010. "Oil Prices and Economic Activity: A Brief Update," Economics Bulletin, AccessEcon, vol. 30(2), pages 1411-1424.
  2. Engemann, Kristie M. & Kliesen, Kevin L. & Owyang, Michael T., 2011. "Do Oil Shocks Drive Business Cycles? Some U.S. And International Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 498-517, November.
  3. Jaime Casassus & Freddy Higuera, 2013. "The Economic Impact of Oil on Industry Portfolios," Documentos de Trabajo 433, Instituto de Economia. Pontificia Universidad Católica de Chile..
  4. Jaime Casassus & Freddy Higuera, 2011. "Stock Return Predictability and Oil Prices," Documentos de Trabajo 406, Instituto de Economia. Pontificia Universidad Católica de Chile..

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