Oil and the U.S. Macroeconomy: An Update and a Simple Forecasting Exercise

Federal Reserve Bank of St. Louis Working Paper No. 2008-009A

31 Pages Posted: 23 Apr 2008  

Kevin L. Kliesen

Federal Reserve Bank of St. Louis - Research Division

Date Written: April 2008

Abstract

Recently, some analysts and economists had warned that the U.S. economy faces a much higher risk of falling into a recession should the price of oil rise to $100 per barrel or more. In February 2008, spot crude oil prices closed above $100 per barrel for the first time ever, and they have since climbed even further. Meanwhile, according to some surveys of economists, there is a high probability that a recession in the United States began in late 2007 or early 2008. Although the findings in this paper are consistent with the view that the U.S. economy has become much less sensitive to large changes in oil prices, a simple forecasting exercise reveals that a permanent increase in the price of crude oil to $150-per barrel-by the end of 2008 would have a significant negative effect on the growth rate of real GDP in the short run. However, the exercise also predicts such an increase in oil prices would have minimal effect on future inflation.

Keywords: Crude oil, forecasts, recession

JEL Classification: Q43, E37, E66

Suggested Citation

Kliesen, Kevin L., Oil and the U.S. Macroeconomy: An Update and a Simple Forecasting Exercise (April 2008). Federal Reserve Bank of St. Louis Working Paper No. 2008-009A. Available at SSRN: https://ssrn.com/abstract=1124028 or http://dx.doi.org/10.2139/ssrn.1124028

Kevin L. Kliesen (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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