Oil and the Macroeconomy : A Markov Switching Approach

This paper analyzes the relationship between oil price shocks and post-war U.S. business cycle fluctuations. We develop a generalized Markov switching model of output that includes a measure of net real oil price increases and examine the capabilities of this variable to generate shifts in the mean of GDP growth and to predict transitions between dichotomous growth phases. The results indicate that while the behavior of oil prices has been a contributing factor to the mean of low growth phases of output, movements in oil prices generally have not been a principal determinant in the historical incidence of these phases