Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications

Using oil futures, we examine expectation formation and how it alters the macroeconomic transmission of shocks. Our empirical framework, where investors learn about the persistence of oil-price movements, successfully replicates the fluctuations in oil-price futures since the Late 1990s. By embedding this learning mechanism in an estimated model, we document that an increase in the persistence of TFP-driven fluctuations in oil demand largely accounts for investors' perceptions that oil-price movements became increasingly permanent during the 2000s. Learning alters the macroeconomic impact of shocks, making the responses time dependent and conditional on perceptions of shocks' likely persistence.