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Oil Prices, Profits, and Recessions: An Inquiry Using Terrorism as an Instrumental Variable

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  • Chen, Natalie
  • Graham, Liam
  • Oswald, Andrew

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.

Suggested Citation

  • Chen, Natalie & Graham, Liam & Oswald, Andrew, 2008. "Oil Prices, Profits, and Recessions: An Inquiry Using Terrorism as an Instrumental Variable," CEPR Discussion Papers 6937, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6937
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    Cited by:

    1. Castro, Vítor, 2010. "The duration of economic expansions and recessions: More than duration dependence," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 347-365, March.

    More about this item

    Keywords

    Energy prices; Industries; Oil shocks; Profitability;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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