Oil price shocks and the macro economy: the United States versus Brazil
Sharp increases in the price of oil and other energy products are referred to in the literature as classical examples of negative supply shocks (e.g. Brown and Yucel 2002; and Hamilton 2005). Increases in the price of oil lead to increases in the cost of production, which in general decrease the rhythm of economic activity and increase inflation. The response of nominal wages and monetary policies can amplify the shocks.2 In an important article, Hamilton (1983) argues that nine out of ten North American recessions after World War II until the mid1970s were preceded by sharp increases in oil prices.3 In addition, he shows that such a correlation between oil prices and output does not represent a statistical coincidence. In particular, he finds evidence ofGranger causality between oil prices and output. Periods of low growth in real GDP and high inflation are preceded by high relative international oil prices. Price increases in oil have also been associated with the productivity slowdown in the 1970s. Table 2.1 relates the growth rates of total factor productivity (TFP) in the United States and in Brazil to the real price of oil for selected fiveyear sub-periods. The overall relation is significantly influenced by a period of unusually low growth in TFP in 1975-1980 (for the Brazilian case one can observe a lagged effect of the early 1970s oil crisis, as TFP is only negatively
affected at a later stage) which coincides with an unusually high real price of oil (see also Barsky and Kilian 2004). One way to see whether the relationship between the oil price and growth of output might not be just a coincidence is by performing a statistical regression of the real GDP growth rate on its lagged values and on lagged logarithmic changes in nominal oil prices, as suggested by Hamilton (2003).