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Global oil supply risk and macro-financial downside risk: Can monetary policy mitigate the risk transmission?

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  • Liu, Zongming
  • Shi, Wenhui

Abstract

This paper examines how global oil supply risks influence macro-financial downside risks in the United States, with a particular focus on the mediating role of monetary policy. Using a Structural Vector Autoregression (SVAR) model with sign restrictions, we find that oil supply risks significantly affect oil market dynamics—supply, prices, and reserves—thereby amplifying macro-financial risk. Counterfactual simulations reveal that oil prices are the primary transmission channel of these effects. Moreover, the Federal Funds Rate tends to decline in response to oil supply risks, mitigating their adverse impact and underscoring the active role of monetary policy. Our results further indicate that negative oil supply shocks mainly drive macro-financial risks, whereas positive shocks can exert a stabilizing influence. Finally, forecast error variance decomposition highlights the stronger explanatory power of second-moment shocks, offering new insights into the complex interplay between oil supply risks and macro-financial stability.

Suggested Citation

  • Liu, Zongming & Shi, Wenhui, 2026. "Global oil supply risk and macro-financial downside risk: Can monetary policy mitigate the risk transmission?," Economic Modelling, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:ecmode:v:154:y:2026:i:c:s0264999325003645
    DOI: 10.1016/j.econmod.2025.107369
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