Did The Oil Shock Cause The World Wide Recession?
I have been arguing, for months, that the sharp increase in oil prices must have been one of the principal causes of the recession. Now economist James Hamilton is making the same argument, only far more rigorously. Take a look at his diagram — which I will not borrow without his permission — and then consider his conclusions: One of the most interesting calculations for me was to look at the implications of my 2003 model. I used those historically estimated parameters to find the answer to the following conditional forecasting equation. Suppose you knew in 2007:Q3 what GDP had been doing up through that date and could know in advance what was about to happen to the price of oil. What path would you have then predicted the economy to follow for 2007:Q4 through 2008:Q4? The answer is given in the diagram below. The green dotted line is the forecast if we ignored the information about oil prices, while the red dashed line is the forecast conditional on the huge run-up in oil prices that
