Analyzing the Impact of Oil Price Movements on the Economic Activity of Hungary

This paper focuses on the investigation of both theoretical and empirical comprehension of the relationship between oil price movements and economic activity for a net crude oil importing country, Hungary, as a case study. Sample period for this research spans from 15th January 2000 to 15th February 2019. The sample period accounts for notable episodes in economic activity which may be linked with oil price falls or shocks (increases). To examine this relationship, we use monthly data on Brent oil price and Hungarian industrial production index to proxy its economic activity. So as to take into account the changes in the state of the economy we employ a regime switching approach, particularly the Markov switching model (MS) using two regimes, otherwise known as states. After rigorous empirical analysis, using the Markov-switching model (MS), we found that a link exists between changes in oil-prices and economic activity. Although, the effect of an oil price shock does not immediately lead to changes in economic growth, it unfolds after the fourth quarter. This is logical because supply contracts could delay the effect of such oil shock from affecting economic growth. Furthermore, we investigated if there is any asymmetric oil-price effect on the economic activity of Hungary. To analyze if such an effect exists, we employ Mork’s positive and negative oil price specification and Hamilton’s net oil price index (NOPI). The results from our investigation imply that positive and negative changes in the price of oil do not have same impact in Hungary’s economic growth. Although Mork’s specification implies that oil-price decline would propel growth in the economy of Hungary, this impact is lesser than the decrease associated when there is an oil price increase. Keywords: economic growth, oil price shock, asymmetric effect, Markov-switching model.