Oil Price Shocks and Economic Growth: The Volatility Link
44 Pages Posted: 10 Apr 2018 Last revised: 25 Dec 2018
Date Written: July 1, 2018
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 find 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
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