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What is an Oil Shock?

  • James D. Hamilton

This paper uses a flexible approach to characterize the nonlinear relation between oil price changes and GDP growth. The paper reports clear evidence of nonlinearity, consistent with earlier claims in the literature-- oil price increases are much more important than oil price decreases, and increases have significantly less predictive content if they simply correct earlier decreases. An alternative interpretation is suggested based on estimation of a linear functional form using exogenous disruptions in petroleum supplies as instruments. The evidence suggests that oil shocks matter because they disrupt spending by consumers and firms on certain key sectors.

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File URL: http://www.nber.org/papers/w7755.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7755.

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Date of creation: Jun 2000
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Publication status: published as Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
Handle: RePEc:nbr:nberwo:7755
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