Reed College
Reed College

Economics 314

Macroeconomic Theory
Spring 2017
Jeffrey Parker, Reed College

March 3 paper of the week

Assigned paper

Hamilton, James D. 2011. Historical Oil Shocks. Cambridge, Mass.: National Bureau of Economic Research. NBER Working Papers, No. 16790.

Note: This paper is an "update" of a famous, but now dated, paper: Hamilton, James D. 1983. Oil and the Macroeconomy since World War II. Journal of Political Economy 91 (2):228-48.

Reading suggestions

  • This paper cites many of the author's earlier papers. Most of these should be available through the Reed Library journals collection if you want to take a glance at them. The other papers that are most relevant to his macroeconomic points are the papers by Barsky and by Kilian. Again, these should be available should you want to explore in more detail.
  • The main section of the paper is a long history of the world oil market. Read it to get the basic idea, but you don't need to memorize the details of all of the events described. Do focus heavily on Section 6, where he interprets the history in terms of macroeconomics.

Questions for analysis

  1. Some readers of Hamilton's work have argued that it supports the extreme version of the real business cycle model in that all recessions can be explained by supply shocks. (He himself does not go that far.) To what extent is there an empirical correlation between oil shocks and U.S. recessions? 
  2. The statistical connection between oil prices and GDP is difficult to assess with confidence. The conventional interpretation is that oil shocks cause recessions. But how might "reverse causality" (GDP --> oil prices) lead to the same pattern of empirical correlations between oil prices and business cycles?
  3. Given that oil is an important input to production in many industries, explain how an increase in world oil prices might affect aggregate supply in an economy that imports much of its oil.
  4. Why might increases in the world oil price affect aggregate demand as well as aggregate supply?
  5. Hamilton argues that "non-price rationing" of oil during world oil shortages affects the degree to which the shortage affects the macroeconomy. What is non-price rationing and why would it affect the impact of oil shocks on both aggregate supply and aggregate demand?