Can oil shocks explain asymmetries in the US Business Cycle?

Abstract

We consider whether oil prices can account for business cycle asymmetries. We test for asymmetries based on the Markov switching autoregressive model popularized by Hamilton (1989), using the tests devised by Clements and Krolzig (2000). We select the transformation of the oil price of Lee, Ni and Ratti (1995), based on a linear analysis of the relationship between output growth and the oil price employing PcGets. We find overwhelming evidence against the conventional wisdom that recessions are more violent than expansions: while some of violence of economic downturns can be attributed to dramatic changes in the price of oil, post-War US economic growth is characterized by the steepness of expansions. JEL classification: E32, C32, E24.

A Note on Demand and Supply Factors in Manufacturing Output Asymmetries

“…Both Hamilton (2003) and Clements and Krolzig (2002) agree that this measure captures much of the nonlinear (though not necessarily asymmetric) effect of oil prices on GDP. Hamilton (2003) has also emphasized that military conflicts have caused nearly all the oil price shocks of the postwar period.…”

A unified approach to nonlinearity, structural change, and outliers

“…In particular, following Hamilton (1989) many attempts have been made to describe the apparent asymmetric behavior over the business cycle in US and international output using Markov-switching models, see Clements and Krolzig (2002), Wang (2002, 2003) and Kim et al (2005) for recent contributions, and Hamilton and Raj (2002) for a survey. 8 Structural change in the properties of output has also been heavily investigated.…”

Forecasting oil prices: Smooth transition and neural network augmented GARCH family models

“…Among the studies focusing on modeling nonlinarity in petrol prices, Raymond and Rich (1997), Clements and Krolzig (2002) and Holmes and Wang (2003) evaluated oil prices by discussing the impacts of oil shocks on US and UK in perspective of business cycles by using the Markov Switching (MS) model. Huang et al (2005) utilized a threshold model to investigate the impacts of oil price changes and their volatility on economic activity.…”