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The Effects of Oil Price Shocks on Output

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  • Neal Ghosh
  • Chris Varvares
  • James Morley

Abstract

This analysis explores the effects of oil price shocks on U.S. economic growth. We begin with a well-known model developed by James Hamilton, consider refinements to his definition of an oil price “shock,” and then explore alternatives to his basic reduced-form model. We find that a structurally inspired error-correction model for non-farm business output, which allows for oil price changes to have both long-run and short-run effects, performs better than the basic reduced-form model and also shows significantly smaller adverse effects of rising oil prices. Our preferred model suggests that oil prices reduced GDP growth by about 0.4 percentage point on average through the first three quarters of 2008, before contributing 1.7 percentage points in the fourth quarter as prices plummeted.

Suggested Citation

  • Neal Ghosh & Chris Varvares & James Morley, 2009. "The Effects of Oil Price Shocks on Output," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 44(4), pages 220-228, October.
    • Handle: RePEc:pal:buseco:v:44:y:2009:i:4:p:220-228
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    Cited by:

    1. Malek KhojastehNeghad & Raheleh Hosseini, 0. "Effects of Oil Shocks on the Unemployment: GVAR Approach," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(65), pages 50-69, September.

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