What is an oil shock?

• Published in: Journal of econometrics Vol. 113; no. 2; pp. 363 - 398
• Main Author: Hamilton, James D.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.04.2003; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Econometrics
• Subjects: Applications; Applied sciences; Econometrics; Economic fluctuations; Exact sciences and technology; Functional form; GDP; Gross Domestic Product; Inference from stochastic processes; time series analysis; Insurance, economics, finance; Linear inference, regression; Mathematics; Non-linear models; Nonlinear models; Oil; Oil price; Oil shocks; Operational research and scientific management; Operational research. Management science; Prices; Probability and statistics; Sciences and techniques of general use; Statistics; Studies; Nonlinear models; C32; Oil shocks; Economic fluctuations; E32; Functional form; Statistical method; Instrumental variable; Stability; Economic fluctuation; Price index; Non linear model; Time series; Oil crisis; Statistical estimation; Econometrics; Linear functional; Empirical model
• ISSN: 0304-4076; 1872-6895
• DOI: 10.1016/S0304-4076(02)00207-5

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.