Oil and Macroeconomic (In)Stability

50 Pages Posted: 24 Sep 2016

See all articles by Hilde C. Bjørnland

Hilde C. Bjørnland

Norwegian School of Management (BI); Norges Bank

Vegard Larsen

Norges Bank

Junior Maih

Norges Bank

Multiple version iconThere are 2 versions of this paper

Date Written: September 16, 2016

Abstract

We analyze the role of oil price volatility in reducing U.S. macroeconomic instability. Using a Markov Switching Rational Expectation New-Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role.

JEL Classification: C11, E32, E42 Q43

Suggested Citation

Bjørnland, Hilde C. and Larsen, Vegard and Maih, Junior, Oil and Macroeconomic (In)Stability (September 16, 2016). Norges Bank Working Paper 12/16. Available at SSRN: https://ssrn.com/abstract=2842560 or http://dx.doi.org/10.2139/ssrn.2842560

Hilde C. Bjørnland (Contact Author)

Norwegian School of Management (BI) ( email )

P.O. Box 580
N-1302 Sandvika
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Vegard Larsen

Norges Bank ( email )

P.O. Box 1179
Oslo, Oslo N-0107
Norway
+4745831155 (Phone)

HOME PAGE: http://www.vegardlarsen.com

Junior Maih

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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