ShanghaiTech SEM Working Paper No. 2018-004
John M. Maheu
McMaster University and RCEA - DeGroote School of Business
Yong Song
University of Melbourne and RCEA
Qiao Yang
ShanghaiTech University - School of Entrepreneurship and Management
Abstract
This paper shows that oil shocks primarily impact economic growth through the conditional variance of growth. We move beyond the literature that focuses on conditional mean point forecasts and compare models based on density forecasts. Over a range of dynamic models, oil shock measures and data we nd a robust link between oil shocks and the volatility of economic growth. A new measure of oil shocks is developed and shown to be superior to existing measures and indicates that the conditional variance of growth increases in response to an indicator of local maximum oil price exceedance. The empirical results uncover a large pronounced asymmetric response of growth volatility to oil price changes. Uncertainty about future growth is considerably lower compared to a benchmark AR(1) model when no oil shocks are present.
Keywords: Bayes factors, predictive likelihoods, nonlinear dynamics, density forecast
JEL Classification: C53, C32, C11, Q43
Date Written: December 2017
Available at SSRN: http://ssrn.com/abstract=3159715
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【No. 2018-004】SSRN-2 Oil Price Shocks and Economic Growth- The Volatility Link.pdf
