The Marcoeconomic Effects of Oil Price, Credit Cycles, and the Sovereign Risk Premium

Posted: 30 Jan 2020 Last revised: 17 Apr 2020

See all articles by Kaisheng Luo

Kaisheng Luo

Durham University Business School

Duc Khuong Nguyen

IPAG Business School

Nikos Paltalidis

Durham University Business School

Date Written: January 9, 2020

Abstract

Sovereign credit risk in developed countries was essentially non-existent prior to 2009. We find new factors suggesting that a part of the European sovereign risk premium is exogenously determined. We capture a novel phase synchronization that is associated with an increase in the cost of public debt. We start by showing that 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 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, affects macroeconomic dynamics and transmits to the sovereign credit market.

Keywords: Sovereign Credit Risk; Oil Price Cycles; Credit Cycles; Credit Booms; Markov Switching Regimes

JEL Classification: G01; G12; C32; E32; F34; Q43

Suggested Citation

Luo, Kaisheng and Nguyen, Duc Khuong and Paltalidis, Nikos, The Marcoeconomic Effects of Oil Price, Credit Cycles, and the Sovereign Risk Premium (January 9, 2020). Available at SSRN: https://ssrn.com/abstract=3516561

Kaisheng Luo

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom
+44 07549-848587 (Phone)

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Nikos Paltalidis (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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