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Using Financial Markets Information to Identify Oil Supply Shocks in a Restricted VAR

  • Marko Melolinna

    ()

    (Bank of Finland, Monetary Policy and Research Department)

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    This paper introduces a methodology for identifying oil supply shocks in to a small open economy. Financial market information is used to construct an identification scheme that forces the response to an oil shock of the restricted VAR model to be the same as that implied by futures markets. Due to the identification scheme, the model is only partially identified, and confidence intervals for impulse responses are calculated by using a bootstrapping procedure. The methodology is applied in illustrative examples to Finland and Sweden in a simple 5-variable model that includes key domestic and international macroeconomic variables. While oil supply shocks have an effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is ambiguous.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/fep12011/fep12011_melolinna.pdf
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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 24 (2011)
    Issue (Month): 1 (Spring)
    Pages: 33-54

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    Handle: RePEc:fep:journl:v:24:y:2011:i:1:p:33-54
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    1. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    2. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
    3. Alessio Anzuini & Marco J. Lombardi & Patrizio Pagano, 2012. "The impact of monetary policy shocks on commodity prices," Temi di discussione (Economic working papers) 851, Bank of Italy, Economic Research and International Relations Area.
    4. Richard Paap & Frank Kleibergen, 2004. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Society 2004 Australasian Meetings 195, Econometric Society.
    5. Juncal Cuñado & Fernando Pérez de Gracia, . "Do Oil Price Shocks Matter? Evidence For Some Europesan Countries," Working Papers on International Economics and Finance 01-02, FEDEA.
    6. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
    7. repec:hal:journl:hal-00287137 is not listed on IDEAS
    8. Robin, Jean-Marc & Smith, Richard J., 2000. "Tests Of Rank," Econometric Theory, Cambridge University Press, vol. 16(02), pages 151-175, April.
    9. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
    10. Kilian, Lutz, 2005. "Exogenous Oil Supply Shocks: How Big Are They and How Much do they Matter for the US Economy?," CEPR Discussion Papers 5131, C.E.P.R. Discussion Papers.
    11. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2007. "Oil supply news in a VAR: Information from financial markets," Temi di discussione (Economic working papers) 632, Bank of Italy, Economic Research and International Relations Area.
    12. Burbidge, John & Harrison, Alan, 1984. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 459-84, June.
    13. Cragg, John G. & Donald, Stephen G., 1997. "Inferring the rank of a matrix," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 223-250.
    14. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters, in: Asset Prices and Monetary Policy, pages 291-333 National Bureau of Economic Research, Inc.
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