Nonlinearity and Structural Breaks in Oil Prices: Policy Implications and Macroeconomic Interactions

Abstract

This study examines Brent crude oil price dynamics using an integrated framework of bootstrap sequential break detection and Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) modeling. We demonstrate that oil prices follow an AESTAR process where structural breaks emerge endogenously through dual transition functions, reconciling previously competing explanations in the literature. Analysis of monthly data (1985-2023) identifies major structural shifts coinciding with critical economic events, while revealing these breaks emerge automatically through regime-dependent means. Enhanced testing confirms embedded LSTAR-dominant dynamics with ESTAR components, while skeleton analysis validates the dual equilibrium framework with balanced regime distribution. Generalized Impulse Response Function analysis reveals distinct shock transmission patterns: Tier 1 extreme events (delta max > 1.8) exhibit persistent deviations requiring sustained policy intervention, while Tier 2 events demonstrate mean reversion properties suitable for conventional responses. The framework provides observable threshold levels ($53.62, $37.39) enabling real-time policy intervention, supporting regime-contingent monetary policy and strategic petroleum reserve management protocols. This approach offers policymakers actionable tools for managing oil price volatility through empirically validated intervention strategies.