Oil Prices and Consumer Spending

Although a large body of empirical research indicates that oil priceincreases have a significant negative effect on real GDP growth, con-siderable debate exists about both the strength and stability of the relation between oil prices and GDP. In particular, some analysts contend that the estimated linear relations between oil prices and several macroeconomic variables appear much weaker since the 1980s (Hooker 1996).1 The evidence of a weakening effect of an oil price change on the macro-economy in data since the 1980s happens to coincide with another change in the nature of oil price movements: Before 1981, most big oil price movements were positive. Since then, however, oil prices have moved significantly in both directions, reflecting the influences of endogenous macrodevelopments on oil prices. The choppy nature of oil price movements since the 1980s has led some analysts to argue that evidence indicating that oil price changes do not have much of an effect on real GDP is spurious and that the evidence arises from the use of endogenous oil price series. Hamilton (2003), in fact, posits that the relation between oil price changes and real GDP growth is nonlinear, namely, that oil price increases matter but oil price declines do not. Furthermore