This paper analyzes the relationship between oil price shocks and post
war U.S. business cycle fluctuations. We develop a generalized Markov
switching model of output that includes a measure of net real oil pric
e increases and examine the capabilities of this variable to generate
shifts in the mean of GDP growth and to predict transitions between di
chotomous growth phases. The results indicate that while the behavior
of oil prices has been a contributing factor to the mean of low-growth
phases of output, movements in oil prices generally have not been a p
rincipal determinant in the historical incidence of these phases.