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Oil price elasticities and oil price fluctuations

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  • Caldara, Dario
  • Cavallo, Michele
  • Iacoviello, Matteo

Abstract

Studies identifying oil shocks using structural vector autoregressions (VARs) reach different conclusions on the relative importance of supply and demand factors in explaining oil market fluctuations. This disagreement is due to different assumptions on the oil supply and demand elasticities that determine the identification of the oil shocks. We provide new estimates of oil-market elasticities by combining a narrative analysis of episodes of large drops in oil production with country-level instrumental variable regressions. When the estimated elasticities are embedded into a structural VAR, supply and demand shocks play an equally important role in explaining oil prices and oil quantities.

Suggested Citation

  • Caldara, Dario & Cavallo, Michele & Iacoviello, Matteo, 2019. "Oil price elasticities and oil price fluctuations," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 1-20.
  • Handle: RePEc:eee:moneco:v:103:y:2019:i:c:p:1-20
    DOI: 10.1016/j.jmoneco.2018.08.004
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    More about this item

    Keywords

    Oil market; Oil elasticity; Vector autoregressions; Narrative analysis; Instrumental variables;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General

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