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The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries

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  • Matteo Manera

    (University of Milan-Bicocca and Fondazione Eni Enrico Mattei)

  • Alessandro Cologni

    (IMT Institute for Advanced Studies)

Abstract

In this paper we specify and estimate different Markov-switching (MS) regime autoregressive models. The empirical performance of the univariate MS models used to describe the switches between different economic regimes for the G-7 countries is in general not satisfactory. We extend these models to verify if the inclusion of asymmetric oil shocks as an exogenous variable improves the ability of each specification to identify the different phases of the business cycle for each country under scrutiny. Following the wide literature on this topic, we have considered six different definitions of oil shocks: oil price changes, asymmetric transformations of oil price changes, oil price volatility, and oil supply conditions. We measure the persistence of each economic regime, as well as the ability of each MS model to detect the business cycle dates as described by widely acknowledged statistical institutions. Our empirical findings can be summarized as follows. First, the null hypothesis of linearity against the alternative of a MS specification is always rejected by the data. This suggests that regime-dependent models should be used if a researcher is interested in obtaining statistically adequate representations of the output growth process. Second, three-regime MS models typically outperform the corresponding two-regime specifications in describing the business cycle features for each country. Third, the introduction of different oil shock specifications is never rejected. Fourth, positive oil price changes, net oil price increases and oil price volatility are the oil shock definitions which contribute to a better description of the impact of oil on output growth. Finally, models with exogenous oil variables generally outperform the corresponding univariate specifications which exclude oil from the analysis.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.29.

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Date of creation: Feb 2006
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Handle: RePEc:fem:femwpa:2006.29

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Keywords: Oil shocks; Output growth; Markov-switching models;

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References

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Cited by:
  1. Hammoudeh, Shawkat & Bhar, Ramaprasad & Thompson, Mark A., 2010. "Re-examining the dynamic causal oil-macroeconomy relationship," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 298-305, September.
  2. Troy Davig & Eric M. Leeper, 2006. "Endogenous Monetary Policy Regime Change," NBER Working Papers 12405, National Bureau of Economic Research, Inc.
  3. Kisswani, Khalid /M. & Nusair, Salah /A., 2012. "Non-linearities in the dynamics of oil prices," MPRA Paper 36586, University Library of Munich, Germany.
  4. Virjinia Jeliazkova, 2010. "Effects of the Dynamics of the Oil Price – Theoretical and Empirical Bases," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 127-165.
  5. Alom, Fardous, 2011. "Economic Effects of Oil and Food Price Shocks in Asia and Pacific Countries: An Application of SVAR Model," 2011 Conference, August 25-26, 2011, Nelson, New Zealand 115346, New Zealand Agricultural and Resource Economics Society.
  6. Arouri, Mohamed El Hedi & Lahiani, Amine & Nguyen, Duc Khuong, 2011. "Return and volatility transmission between world oil prices and stock markets of the GCC countries," Economic Modelling, Elsevier, vol. 28(4), pages 1815-1825, July.
  7. J. Isaac Miller & Ronald Ratti, 2008. "Crude Oil and Stock Markets: Stability, Instability, and Bubbles," Working Papers 0810, Department of Economics, University of Missouri, revised 20 Jan 2009.
  8. Mohamed El Hedi Arouri & Julien Fouquau, 2009. "On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses," Papers 0905.3870, arXiv.org.
  9. Aloui, Chaker & Jammazi, Rania, 2009. "The effects of crude oil shocks on stock market shifts behaviour: A regime switching approach," Energy Economics, Elsevier, vol. 31(5), pages 789-799, September.

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