Abstract
One characteristic of many macroeconomic and financial time series is their asymmetric
behaviour during different phases of a business cycle. Oil price shocks have been amongst those
economic variables that have been identified in theoretical and empirical literature to predict the
phases of business cycles. However, the role of oil price shocks to determine business cycle
fluctuations has received less attention in emerging and developing economies. The aim of this
study is to investigate the role of oil price shocks in predicting the phases of the South African
business cycle associated with higher and lower growth regimes. By adopting a regime dependent
analysis, we investigate the impact of oil price shocks under two phases of the business cycle,
namely high and low growth regimes. As a net importer of oil, South Africa is expected to be
vulnerable to oil price shocks irrespective of the phase of the business cycle. Using a Bayesian
Markov switching vector autoregressive (MS-VAR) model and data for the period 1960Q2 to
2013Q3, we found the oil price to have predictive content for real output growth under the low
growth regime. The results also show the low growth state to be shorter-lived compared to the
higher growth state.