What is an Oil Shock?

59 Pages Posted: 19 Jul 2000 Last revised: 12 Mar 2021

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Date Written: June 2000

Abstract

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.

Suggested Citation

Hamilton, James D., What is an Oil Shock? (June 2000). NBER Working Paper No. w7755, Available at SSRN: https://ssrn.com/abstract=235711

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