Friday, October 16, 2009

2007-08 Oil Price Run-up Caused Recession

The oil price increases of 2007-08 affected overall US consumption spending and caused of the 2007:Q4 to 2008:Q3 recession, according to the Federal Reserve Bank Of Atlanta research paper, "Causes and Consequences of the Oil Shock of 2007–08" by James D. Hamilton, CQER Working Paper 09-02, October 2009.

The paper's abstract:
This paper explores similarities and differences between the run-up of oil prices in 2007–08 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 2007–08 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 2007–08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
Read the complete paper here.

Also, see my April post, "Did The 2007-08 Oil Price Shocks Cause The Current Recession?"

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