The Changing Marcoeconomic Effects of Oil Price and Credit Cycles
Posted: 30 Jan 2020
Date Written: January 9, 2020
The macroeconomic effects of oil price shocks have changed over time, even though the magnitude of the shocks is similar across different episodes. To explain this change, we suggest that the magnitude of the effect is different in 2008 because there is “phase synchronization” where oil price and credit cycles are synchronized in an unprecedented boom and bust episode. To test this hypothesis, we propose a novel econometric procedure, by introducing a novel Markov-Switching VAR model, and matching it with estimated oil price episodes (Blanchard and Galí, 2009) and credit booms (Jordà, Schularick, and Taylor, 2013). Once we establish the relationship between the cycles and the macroeconomic aggregates, we estimate impulse response functions to find that only during the phase synchronization of the two cycles the magnitude of the effect is strong with a clear sign across the whole time period. We also estimate credit booms by using different techniques proposed by the literature, but our findings remain robust independent of the credit cycle identification strategy.
Keywords: Oil price cycles; Credit cycles; Credit Booms; Markov Switching Regimes
JEL Classification: C32; E32; F34; Q43
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