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Oil and the macroeconomy revisited

  • Mark A. Hooker
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    The relationship between oil price shocks and U.S. macroeconomic fluctuations advocated by Hamilton (1983) broke down in the 1980s amidst a new regime of highly volatile oil price movements. Several authors have argued that asymmetric and nonlinear transformations of oil prices restore that relationship and thus that the economy responds asymmetrically and nonlinearly to oil price shocks. In this paper, I show that this is only part of the story: the two leading such transformations do not in fact Granger cause output or unemployment in the post-1980 period without further refinements, and they derive much of their apparent success from data in the 1950s. If output is expressed in year-over-year changes, which are smoother than the usual quarterly changes, and the equations exclude variables like interest rates and inflation, then asymmetric and nonlinear oil prices predict output but not unemployment, while the real level of oil prices predicts unemployment but not output. I interpret this evidence as supportive of significant oil price effects on the macroeconomy which a) are at relatively low frequencies, b) are indirect, through variables like interest rates and inflation, c) can induce departures from Okun's law, and d) changed qualitatively around 1980.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-43.

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    Date of creation: 1999
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    Handle: RePEc:fip:fedgfe:1999-43
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    1. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    2. Steven J. Davis & John Haltiwanger, 1999. "Sectoral Job Creation and Destruction Responses to Oil Price Changes," NBER Working Papers 7095, National Bureau of Economic Research, Inc.
    3. Burbidge, John & Harrison, Alan, 1984. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 459-84, June.
    4. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
    5. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
    6. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
    7. Carruth, A.A. & Hooker, M.A. & Oswald, A.J., 1998. "Unemployment Equilibria and Input Prices: Theory and Evidence from the United States," The Warwick Economics Research Paper Series (TWERPS) 496, University of Warwick, Department of Economics.
    8. Thoma, Mark A & Gray, Jo Anna, 1998. "Financial Market Variables Do Not Predict Real Activity," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 522-39, October.
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