Sunday, August 14, 2011

"Economic consequences of recent oil price changes"

Following up on Thursday's "Straws in the Wind: Was First Half Weakness Caused By Oil Prices?".
From Econbrowser:
Earlier this year, disruptions in Libya and the resurgence of demand from the emerging economies sent oil prices up sharply, a development that many economists believe contributed to the slow growth for 2011:H1. The chaotic markets of the last few weeks saw oil prices drop back down to where they had been in December. Will that be enough to revive the struggling U.S. economy? There is some evidence suggesting that it may be too late.

I recently completed a survey of a large number of academic studies that found a nonlinear economic response to oil price changes. One very well-established observation is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms. For example, when oil prices plunged in the mid-1980s, the oil-producing states in the U.S. experienced what looked like their own regional recession. An oil price increase that just reverses a recent price decrease does not seem to have the same economic effects as a price move that establishes new highs....

...To illustrate the implications of the above regression, suppose that the price of oil increases by 10% in quarter t over its high for the previous year, with no subsequent increases beyond that. The figure below plots the predicted consequences for the GDP growth rate in quarter t+j as a function of j, how many quarters it's been since the price went up. Four quarters after the increase, we might expect to see real GDP in that quarter growing almost 1.4% slower at an annual rate than it otherwise would have. [Note this is not simply a plot of the lagged coefficients on pt-j because it also incorporates dynamic feedback arising from the lagged coefficients on yt-j].
Horizontal axis: number of quarters following a quarter in which the price of oil exceeds its previous high by 10%. Vertical axis: predicted change in GDP growth rate for that quarter.