Oil price shocks and US business cycles

Abstract

This paper investigates the macroeconomic effects of oil price shocks on the US economy, focusing on how changes in oil supply expectations impact key indicators. We introduce an instrument to identify these shocks by isolating exogenous fluctuations in daily crude oil futures linked to catastrophic events in major oil-producing countries. These events arise independently of short-term market dynamics, minimizing reverse causality concerns. The shock disrupts oil operations, reduces economic activity, and increases unemployment and inflation, highlighting the role of oil prices in driving business cycles. Comprehensive robustness checks and analysis of other major economies reinforce the validity of our findings.