School of Economics and Finance

No. 524: The Impact of Large Structural Shocks on Economic Relationships: Evidence from Oil Price Shocks

George Kapetanios , Queen Mary, University of London

October 1, 2004

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This paper introduces a new model of structural breaks which assumes that structural breaks are driven by large economic shocks. The model specifies that both the timing and size of breaks are stochastic and it can be used to investigate the impact of large economic shocks on the stability of economic relationships. An application of the model to the oil-macroeconomy relationship has shown that the apparent instability of this relationship since the oil crisis in year 1973 can be attributed to large oil price shocks.

J.E.L classification codes: C13, C22, E32

Keywords:Structural breaks, State space model, Oil shocks