Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects

Every U.S. recession since 1971 has been preceded by two things: an oil price shock and an increase in the federal funds rate. Bernanke, Gertler, and Watson (1997, 2004) investigated how much oil price shocks have contributed to output growth by asking the following counterfactual question:...