Oil Price Shocks and Economic Growth: The Volatility Link

44 Pages Posted: 10 Apr 2018 Last revised: 25 Dec 2018

See all articles by John M. Maheu

John M. Maheu

McMaster University - Michael G. DeGroote School of Business; RCEA

Yong Song

University of Melbourne

Qiao Yang

ShanghaiTech University - School of Entrepreneurship and Management

Date Written: July 1, 2018

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 fi nd 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.

Keywords: Bayes factors, predictive likelihoods, nonlinear dynamics, density forecast

JEL Classification: C53, C32, C11, Q43

Suggested Citation

Maheu, John M. and Song, Yong and Yang, Qiao, Oil Price Shocks and Economic Growth: The Volatility Link (July 1, 2018). ShanghaiTech SEM Working Paper No. 2018-004. Available at SSRN: https://ssrn.com/abstract=3159715 or http://dx.doi.org/10.2139/ssrn.3159715

John M. Maheu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://profs.degroote.mcmaster.ca/ads/maheujm/

RCEA

Via Patara, 3
Rimini (RN), RN 47900
Italy

HOME PAGE: http://www.rcfea.org/

Yong Song

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Qiao Yang (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

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