Oil and the G7 business cycle : Friedman's Plucking Markov Switching Approach
To analyze whether oil price can account for the business cycle asymmetries in the G7, this paper adopts the Friedmanâ€™s Plucking Markov Switching Model to decompose G7 real GDPs into common permanent components, common transitory components, infrequent Markov Switching negative shock and domestic idiosyncratic components. The findings show that Hamiltonâ€™s 3 year net oil price increases account for 1973-75, 1980, partially 1990-1991 recessions and LNR oil price increases account for 1973-75, 1980, partially 1960, partially 1970, partially 1990-1991 recessions. These results indicate that oil price shocks have not been a principal determinant of common recessions in the G7 except two major OPEC oil price increases in 1973-1974, 1979-1980
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