The effects of oil price shocks on output

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. © National Association for Business Economics.