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Do oil shocks drive business cycles? some U.S. and international evidence

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  • Kristie M. Engemann
  • Kevin L. Kliesen
  • Michael T. Owyang

Abstract

Hamilton (2005) noted that nine of the last ten recessions in the United States were preceded by a substantial increase in the price of oil. In this paper, we consider whether oil price shocks significantly increase the probability of recessions in a number of countries. Because business cycle turning points generally are not available for other countries, we estimate the turning points together with oil's effect in a Markov-switching model with time-varying transition probabilities. We find that, for most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average sized shock to oil prices increases the probability of recession in the U.S. by about 60 percentage points over the following year.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-007.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-007

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Keywords: Business cycles ; Petroleum industry and trade;

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Citations

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Cited by:
  1. Engemann, Kristie & Owyang, Michael T. & Wall, Howard J., 2011. "Where is an oil shock?," MPRA Paper 31383, University Library of Munich, Germany.
  2. John C Bluedorn & Jörg Decressin & Marco Terrones, 2013. "Do Asset Price Drops Foreshadow Recessions?," IMF Working Papers 13/203, International Monetary Fund.
  3. Fornari, Fabio & Lemke, Wolfgang, 2010. "Predicting recession probabilities with financial variables over multiple horizons," Working Paper Series 1255, European Central Bank.
  4. Buchmann, Marco, 2011. "Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession," Working Paper Series 1286, European Central Bank.
  5. Hamilton, James D., 2011. "Nonlinearities And The Macroeconomic Effects Of Oil Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 364-378, November.
  6. Claudio Morana, 2013. "The oil price-macroeconomy relationship since the mid-1980s: A global perspective," Working Papers 223, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
  7. James D. Hamilton, 2012. "Oil Prices, Exhaustible Resources, and Economic Growth," NBER Working Papers 17759, National Bureau of Economic Research, Inc.
  8. Ano Sujithan, Kuhanathan & Koliai, Lyes & Avouyi-Dovi, Sanvi, 2013. "Does Monetary Policy Respond to Commodity Price Shocks?," Economics Papers from University Paris Dauphine 123456789/11718, Paris Dauphine University.
  9. Juvenal, Luciana & Petrella, Ivan, 2014. "Speculation in the Oil Market," CEPR Discussion Papers 9808, C.E.P.R. Discussion Papers.
  10. Dhaoui, Abderrazak & Khraief, Naceur, 2014. "Empirical linkage between oil price and stock market returns and volatility: Evidence from international developed markets," Economics Discussion Papers 2014-12, Kiel Institute for the World Economy.
  11. Cunado, Juncal & Perez de Gracia, Fernando, 2014. "Oil price shocks and stock market returns: Evidence for some European countries," Energy Economics, Elsevier, vol. 42(C), pages 365-377.

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