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Oil Price Shocks and Economic Growth: The Volatility Link

Author

Listed:
  • John M. Maheu

    () (DeGroote School of Business, McMaster University, Canada; Rimini Centre for Economic Analysis)

  • Yong Song

    () (University of Melbourne, Australia; Rimini Centre for Economic Analysis)

  • Qiao Yang

    () (School of Entrepreneurship and Management, ShanghaiTech University, China)

Abstract

This paper shows that oil shocks primarily impact economic growth through the conditional variance of growth. We move beyond the literature that focuses on conditional mean point forecasts and compare models based on density forecasts. Over a range of dynamic models, oil shock measures and data we find a robust link between oil shocks and the volatility of economic growth. A new measure of oil shocks is developed and shown to be superior to existing measures and indicates that the conditional variance of growth increases in response to an indicator of local maximum oil price exceedance. The empirical results uncover a large pronounced asymmetric response of growth volatility to oil price changes. Uncertainty about future growth is considerably lower compared to a benchmark AR(1) model when no oil shocks are present.

Suggested Citation

  • John M. Maheu & Yong Song & Qiao Yang, 2018. "Oil Price Shocks and Economic Growth: The Volatility Link," Working Paper series 18-03, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:18-03
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    References listed on IDEAS

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    Keywords

    Bayes factors; predictive likelihoods; nonlinear dynamics; density forecast;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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