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Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks

Author

Listed:
  • Christiane Baumeister
  • James D. Hamilton

Abstract

Traditional approaches to structural vector autoregressions (VARs) can be viewed as special cases of Bayesian inference arising from very strong prior beliefs. These methods can be generalized with a less restrictive formulation that incorporates uncertainty about the identifying assumptions themselves. We use this approach to revisit the importance of shocks to oil supply and demand. Supply disruptions turn out to be a bigger factor in historical oil price movements and inventory accumulation a smaller factor than implied by earlier estimates. Supply shocks lead to a reduction in global economic activity after a significant lag, whereas shocks to oil demand do not.

Suggested Citation

  • Christiane Baumeister & James D. Hamilton, 2019. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks," American Economic Review, American Economic Association, vol. 109(5), pages 1873-1910, May.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:5:p:1873-1910
    Note: DOI: 10.1257/aer.20151569
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks (AER 2019) in ReplicationWiki

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