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Oil and the G7 business cycle : Friedman's Plucking Markov Switching Approach

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  • Yoon
  • Jae Ho

Abstract

To analyze whether oil price can account for the business cycle asymmetries in the G7, this paper adopts the Friedman’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 Hamilton’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

Suggested Citation

  • Yoon & Jae Ho, 2004. "Oil and the G7 business cycle : Friedman's Plucking Markov Switching Approach," Econometric Society 2004 Far Eastern Meetings 773, Econometric Society.
  • Handle: RePEc:ecm:feam04:773
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    References listed on IDEAS

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    1. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
    2. Gregory, Allan W & Head, Allen C & Raynauld, Jacques, 1997. "Measuring World Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 677-701, August.
    3. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-744, June.
    4. Chang-Jin Kim & Jeremy M. Piger & Richard Startz, 2001. "Permanent and transitory components of business cycles: their relative importance and dynamic relationship," International Finance Discussion Papers 703, Board of Governors of the Federal Reserve System (U.S.).
    5. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
    6. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    7. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-996, November.
    8. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    More about this item

    Keywords

    oil; OPEC; G7; GDP; business cycle; Friedman’s Plucking Markov Switching; permanent; transitory;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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