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Causes and consequences of the oil shock of 2007–08

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  • James D. Hamilton

Abstract

This paper explores similarities and differences between the run-up of oil prices in 2007â??08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007â??08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the United States. The experience of 2007â??08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series CQER Working Paper with number 2009-02.

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Date of creation: 2010
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Handle: RePEc:fip:fedacq:2009-02

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  1. Edward E. Leamer, 2008. "What's a Recession, Anyway?," NBER Working Papers 14221, National Bureau of Economic Research, Inc.
  2. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  3. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6255, C.E.P.R. Discussion Papers.
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  5. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
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  7. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
  8. Olivier J. Blanchard & Jordi Galí, 2007. "The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s?," Economics Working Papers 1045, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
  9. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, Elsevier, vol. 13(3), pages 203-210, July.
  10. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  11. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 29(1), pages 113-134.
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