Oil and Macroeconomic (In)Stability

52 Pages Posted: 11 Dec 2017

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: December 10, 2017

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.

Keywords: Oil price, Great Moderation, New-Keynesian model, Markov Switching

JEL Classification: C11, E32, E42, Q43

Suggested Citation

Bjørnland, Hilde C. and Larsen, Vegard and Maih, Junior, Oil and Macroeconomic (In)Stability (December 10, 2017). CAMA Working Paper No. 79/2017. Available at SSRN: https://ssrn.com/abstract=3085707 or http://dx.doi.org/10.2139/ssrn.3085707

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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