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:...

We trace the consequences of an energy shock on the economy under two different monetary policy rules: a standard Taylor rule where the Fed responds to inflation and the output gap; and a Taylor rule with inertia where the Fed moves slowly to the rate predicted by the standard rule. We show that...