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Oil and macroeconomic (in)stability

Author

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  • Hilde C. Bjørnland

  • Vegard H ghaug 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 volatilityof 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 shocksare 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 ghaug Larsen & Junior Maih, 2017. "Oil and macroeconomic (in)stability," Working Papers No 6/2017, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    • Handle: RePEc:bny:wpaper:0055
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    References listed on IDEAS

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