Title: Macroeconomic implications of oil price fluctuations: A regime-switching framework for the Euro area
Authors: Kirstin Hubrich - Federal Reserve Board (United States) [presenting]
Federic Holm-Hadulla - European Central Bank (Germany)
Abstract: A Markov-switching Vector Autoregressive Model is used to study the response of the Euro area economy to oil price shocks. The model identifies two regimes that are characterized by different effects of oil price fluctuations on economic activity and inflation. In the `normal regime', oil price shocks exert only limited and short-lived effects on these variables. In the `adverse regime', by contrast, oil price shocks trigger sizeable and sustained macroeconomic effects, with inflation and economic activity moving in the same direction as the oil price. The response of inflation expectations points to second-round effects as a potential driver of the dynamics characterising the adverse regime. By delivering (conditional) probabilities for being (staying) in either regime, the model helps interpret oil price fluctuations and assess their monetary policy implications in real-time.