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Disentangling Demand and Supply Shocks in the Crude Oil Market: How to Check Sign Restrictions in Structural VARs

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  • Helmut Lütkepohl
  • Aleksei Netsunajev

Abstract

Given the growing dissatisfaction with exclusion and long-run restrictions in structural vector autoregressive analysis, sign restrictions are becoming increasingly popular. So far there are no techniques for validating the shocks identified via such restrictions. Although in an ideal setting the sign restrictions specify shocks of interest, sign restrictions may be invalidated by measurement errors, data adjustments or omitted variables. We model changes in the volatility of the shocks via a Markov switching (MS) mechanism and use this devise to give the data a chance to object to sign restrictions. The approach is illustrated by considering a small model for the market of crude oil.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.394413.de/dp1195.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1195.

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Length: 25 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1195

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Keywords: Markov switching model; vector autoregression; heteroskedasticity; crude oil market;

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  1. Francesco Lippi & Andrea Nobili, 2010. "Oil and the Macroeconomy: A Quantitative Structural Analysis," EIEF Working Papers Series 1009, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2010.
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  8. Roberto Rigobon & Brian Sack, 2001. "Measuring the reaction of monetary policy to the stock market," Finance and Economics Discussion Series 2001-14, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Dirk-Jan van de Ven & Roger Fouquet, 2014. "Historical energy price shocks and their changing effects on the economy," Grantham Research Institute on Climate Change and the Environment Working Papers 153, Grantham Research Institute on Climate Change and the Environment.

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