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Oil and macroeconomic (in)stability

Author

Listed:
  • Hilde C. Bjørnland
  • Vegard H. Larsen
  • Junior Maih

Abstract

We analyze the role of oil price volatility in reducing U.S. macroeconomic instability. Using a Markov Switching Rational Expectation New-Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role.

Suggested Citation

  • Hilde C. Bjørnland & Vegard H. Larsen & Junior Maih, 2017. "Oil and macroeconomic (in)stability," CAMA Working Papers 2017-79, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2017-79
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    More about this item

    Keywords

    Oil price; Great Moderation; New-Keynesian model; Markov Switching;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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