The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries

60 Pages Posted: 21 Feb 2006 Last revised: 21 Mar 2014

See all articles by Matteo Manera

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Alessandro Cologni

Fondazione Eni Enrico Mattei (FEEM)

Date Written: February 1, 2006

Abstract

In this paper we specify and estimate different Markov-switching (MS) regime autoregressive models. The empirical performance of the univariate MS models used to describe the switches between different economic regimes for the G-7 countries is in general not satisfactory. We extend these models to verify if the inclusion of asymmetric oil shocks as an exogenous variable improves the ability of each specification to identify the different phases of the business cycle for each country under scrutiny. Following the wide literature on this topic, we have considered six different definitions of oil shocks: oil price changes, asymmetric transformations of oil price changes, oil price volatility, and oil supply conditions. We measure the persistence of each economic regime, as well as the ability of each MS model to detect the business cycle dates as described by widely acknowledged statistical institutions. Our empirical findings can be summarized as follows. First, the null hypothesis of linearity against the alternative of a MS specification is always rejected by the data. This suggests that regime-dependent models should be used if a researcher is interested in obtaining statistically adequate representations of the output growth process. Second, three-regime MS models typically outperform the corresponding two-regime specifications in describing the business cycle features for each country. Third, the introduction of different oil shock specifications is never rejected. Fourth, positive oil price changes, net oil price increases and oil price volatility are the oil shock definitions which contribute to a better description of the impact of oil on output growth. Finally, models with exogenous oil variables generally outperform the corresponding univariate specifications which exclude oil from the analysis.

Keywords: Oil shocks, Output growth, Markov-switching models

JEL Classification: E31, E32, E52, Q41

Suggested Citation

Manera, Matteo and Cologni, Alessandro, The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries (February 1, 2006). FEEM Working Paper No. 29.2006, Available at SSRN: https://ssrn.com/abstract=885506 or http://dx.doi.org/10.2139/ssrn.885506

Matteo Manera (Contact Author)

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Alessandro Cologni

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

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