LAST week I noted that volatile oil prices have played an underappreciated role in recent business cycles. Over the weekend, James Hamilton published additional analysis of oil-price changes since last year, and he presents some sobering findings. Mr Hamilton points out that the impact of an oil spike is protracted and asymmetric; dear oil continues to hurt growth quarters after the spike, and subsequent price declines do not have a stimulative effect equal in magnitude to the contractionary impact of the rise. Things get very ugly when runs recent price changes through his model:The price of oil (as measured by the end-of-quarter value for the crude oil producer price index) was 9% higher at the end of 2010 than it had been over the previous year, and the price went up an additional 15% from there during 2011:Q1. The table to the right indicates how much these changes would be predicted to affect GDP growth based on the equation above. For example, if in the absence of the earlier oil price increases we would have seen real GDP growing at a 4% annual rate, given the 2010:Q4-2011:Q1 oil price increases, we would only expect 2.4% growth for 2011:Q3 and 1.6% growth for 2011:Q4 and 2012:Q1. Note that, according to the above relation, it would make no difference for that prediction whether oil prices decline dramatically in 2011:Q3 and 2011:Q4.The drag from the late …
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