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

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  • Chen, Natalie

    (University of Warwick, CEPR)

  • Graham, Liam

    (University College London)

  • Oswald, Andrew J

    (University of Warwick)

Abstract

Nearly all post-war recessions have been preceded by oil-price shocks, but is this because spikes in the price of petroleum cause economic downturns? Most research has ignored 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. Our results 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 J, 2007. "Oil Prices, Profits, and Recessions : An Inquiry Using Terrorism as an Instrumental Variable," The Warwick Economics Research Paper Series (TWERPS) 809, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:809
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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.

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    JEL classification:

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

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