Why do Oil Shocks no Longer Shock?

Oil prices and economic cycles have been firmly linked in the public imagination since
the oil shocks of the 1970s, and the global recessions that followed. Spurred by these
events, economists in the 1980s analysed the relationship in a number of econometric
studies, demonstrating a negative correlation in the US and other industrial countries
between oil prices and macroeconomic performance. Yet while the association is
unambiguous at least in the US up to the early 1980s, at some point thereafter the
relationship appeared to attenuate, and in the last few years we have witnessed a steady
rise in the price of oil to historically high levels with no observable negative impact on
macroeconomic indicators. In this paper I review the literature on the impact of oil price
shocks and use the resulting analysis to explain the minimal impact of high oil prices
today.

By: Paul Segal

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