Abstract

Financialization of oil price and its effects on the economy has been a topic of major interest over the last decade. In this paper, we use a threshold VAR model to investigate how oil price reacts to financial shock in periods of low and high financial stress. We find that the sensitivity of oil price to financial shock imply a six times larger impact and much longer time to recover during periods of high financial stress compared with low stress. Further, oil price shock during different financial regimes has dissimilar effects over inflation and industrial production. Taken together, the findings have several important implications for designing effective policy interventions.