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Modeling structural breaks in economic relationships using large shocks

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  • Kapetanios, G.
  • Tzavalis, E.

Abstract

This paper introduces a new model of structural breaks in the coefficients of economic relationships which allows them to be driven by large past economic shocks. The breaks generated by these shocks can be taken to reflect stochastic changes in agents' decisions or beliefs triggered by extraordinary economic events. Our model specifies that both the timing and size of breaks are stochastic. The last property of it enables us to investigate qualitative effects that large shocks can have on economic relationships. As an empirical application of our model, the paper investigates the stability the oil-economy relationship since the early sixties. From the six large oil-shocks identified by our data, the paper shows that only the first oil shock at the end of 1973 has caused a major long term adverse effect on economic activity. All the large oil price shocks that have happened since then did not have any significant negative effects on the slope of the oil-economy relationship.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 3 (March)
Pages: 417-436

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:417-436

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Structural breaks State space model Oil shocks;

References

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Citations

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Cited by:
  1. Gómez-Loscos, Ana & Montañés, Antonio & Gadea, M. Dolores, 2011. "The impact of oil shocks on the Spanish economy," Energy Economics, Elsevier, vol. 33(6), pages 1070-1081.
  2. George Kapetanios & Tony Yates, 2014. "Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change," Empirical Economics, Springer, vol. 47(1), pages 305-345, August.
  3. Managi, Shunsuke & Okimoto, Tatsuyoshi, 2013. "Does the price of oil interact with clean energy prices in the stock market?," Japan and the World Economy, Elsevier, vol. 27(C), pages 1-9.
  4. Fukuda, Kosei, 2012. "Illustrating extraordinary shocks causing trend breaks," Economic Modelling, Elsevier, vol. 29(4), pages 1045-1052.
  5. Eklund, J. & Kapetanios, G. & Price, S., 2011. "Forecasting in the presence of recent structural change," Working Papers 11/05, Department of Economics, City University London.
  6. Kapetanios, George & Yates, Tony, 2011. "Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change," Bank of England working papers 434, Bank of England.
  7. Giraitis, L. & Kapetanios, G. & Yates, T., 2014. "Inference on stochastic time-varying coefficient models," Journal of Econometrics, Elsevier, vol. 179(1), pages 46-65.

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