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Do Oil Shocks Drive Business Cycles? Some U.S. And International Evidence

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

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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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 15 (2011)
Issue (Month): S3 (November)
Pages: 498-517

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Handle: RePEc:cup:macdyn:v:15:y:2011:i:s3:p:498-517_00
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