Is Oil to Blame?

James Hamilton has a great post on the consequences of the oil shock (it’s three weeks old, unfortunately I just noticed recently). He concludes that the rise in oil prices led to the recession.

The implication that almost all of the downturn of 2008 could be attributed to the oil shock is a stronger conclusion than emerged from any of the other models surveyed in my Brookings paper, and is a conclusion that I don’t fully believe myself. Unquestionably there were other very important shocks hitting the economy in 2007-08, first among which would be the problems in the housing sector. But housing had already been subtracting 0.94% from the average annual GDP growth rate over 2006:Q4-2007:Q3, when the economy did not appear to be in a recession. And housing subtracted only 0.89% over 2007:Q4-2008:Q3, when we now say that the economy was in recession. Something in addition to housing began to drag the economy down over the later period, and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.

Of course the problems in the economy were building for a long time, and without an oil shock, they simply would have been put off and not fixed.

Posted by on April 23rd, 2009 at 10:27 am


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