Markov Switching Oil Price Uncertainty
Oxford Bulletin of Economics and Statistics, Forthcoming
27 Pages Posted: 4 Jan 2019
Date Written: December 19, 2018
We investigate whether the United States economy responds negatively to oil price uncertainty and whether oil price shocks exert asymmetric effects on economic activity. In doing so, we relax the assumption in the existing literature that the data are governed by a single process, modifying the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR to accommodate Markov regime switching in order to account for changing oil price dynamics over the sample period. We find evidence of asymmetries, against those macroeconomic theories that predict symmetries in the relationship between real aggregate economic activity and the real price of oil.
Keywords: Oil price uncertainty, Real options, GARCH-in-Mean VAR, Markov switching
JEL Classification: C32, E32, G31
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