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

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

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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