Oil Prices, Profits, and Recessions: An Inquiry Using Terrorism as an Instrumental Variable

Natalie A. Chen (), Liam Graham and Andrew J. Oswald

No 6937, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Nearly all post-war recessions were preceded by oil-price shocks, but is this because spikes in the price of oil cause economic downturns? At the heart of this question lies an identification problem: oil prices and the state of the world economy are endogenously determined. This paper uses terrorist incidents as an instrumental variable. In an international panel of industries, we show that, after correction for simultaneity bias -- though not before -- the price of oil has large negative effects upon profitability. We test for weak instruments and check sub-sample robustness. Our findings seem to lend support to the claim that oil-price spikes can be a source of recessions.

Keywords: Energy prices; Industries; Oil shocks; Profitability (search for similar items in EconPapers)
JEL-codes: E3 L6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-mac
Date: 2008-08
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Working Paper: Oil Prices, Profits, and Recessions: An Inquiry Using Terrorism as an Instrumental Variable (2007)
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