Oil Price Fluctuation, Macro Financial Linkage in Oil Exporting Country with Markov Switching Vector Autoregression

For estimating the oil price fluctuations effects on banking system and its relationship with macroeconomy, banking system fragility index has been used in this study. Using Kibritçioglu (2003), an index for banking fragility has been calculated. Then, for investigation of interactions between variables, vector autoregressive Markov switching models. Because, different regimes are recognized by taking oil price effects on the economy and banking system into account, Vector autoregressive Markov switching models with three regimes (high, moderate, and low) and one lag has been estimated. Findings show that after oil shock banking fragility index has lowest rate in regime with low risk and in low risk or stable regime, oil price rise makes economic and banking system conditions better. In moderate risk regime, such rise with stable condition economic conditions makes better and low risk regime emerges although it has higher level of banking fragility. In high-risk regime, oil price shocks make economic as well as banking system conditions worse.