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Oil Shock Effects and the Business Cycle
Jones, Collin
Jones, Collin
Abstract
This paper uses a linear projection method proposed by Jorda (2005) to model how the United States business cycle affects the response of output to positive oil price shocks. I use a nonlinear specification for oil price increases, intro- duced by Lee, Ni, and Ratti (1995), which internalizes a number of popular theories in the macroeconomic literature for the determinants of the magni- tude of the oil-output response. I first confirm the results of Lee, Ni, and Ratti (1995), that conditional expected volatility of oil price predictions at the time are important for the output response, with more recent data and an alternate estimation framework. Using a model that allows for coefficient state- switching between periods of low and high output growth, I show that output may be more vulnerable to unexpected oil price increases in the quarters immediately preceding NBER recession periods, although output still does not appear more vulnerable in the recession itself. I lastly discuss what these results indicate regarding possible interpretations of several popular theories of the oil-output response mechanism.
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2016-04-01
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Economics