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Facts and Fiction in Oil Market Modeling

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  • Lutz Kilian

Abstract

Baumeister and Hamilton (2019a) assert that every critique of their work on oil markets by Kilian and Zhou (2019a) is without merit. In addition, they make the case that key aspects of the economic and econometric analysis in the widely used oil market model of Kilian and Murphy (2014) and its precursors are incorrect. Their critiques are also directed at other researchers who have worked in this area and, more generally, extend to research using structural VAR models outside of energy economics. The purpose of this paper is to help the reader understand what the real issues are in this debate. The focus is not only on correcting important misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

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  • Lutz Kilian, 2019. "Facts and Fiction in Oil Market Modeling," CESifo Working Paper Series 7902, CESifo.
  • Handle: RePEc:ces:ceswps:_7902
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    Cited by:

    1. Atsushi Inoue & Lutz Kilian, 2020. "The Role of the Prior in Estimating VAR Models with Sign Restrictions," Working Papers 2030, Federal Reserve Bank of Dallas.
    2. Kilian, Lutz, 2022. "Understanding the estimation of oil demand and oil supply elasticities," Energy Economics, Elsevier, vol. 107(C).
    3. Even Comfort Hvinden, 2019. "OPEC's crude game," Working Papers No 10/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    4. Palmén, Olli, 2020. "Sovereign default risk and credit supply: Evidence from the euro area," Journal of International Money and Finance, Elsevier, vol. 109(C).
    5. Braun, Robin, 2021. "The importance of supply and demand for oil prices: evidence from non-Gaussianity," Bank of England working papers 957, Bank of England.
    6. Hilde C. Bj�rnland, 2019. "Supply flexibility in the shale patch: Facts, no fiction," Working Papers No 08/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    7. Nonejad, Nima, 2020. "An observation regarding Hamilton’s recent criticisms of Kilian’s global real economic activity index," Economics Letters, Elsevier, vol. 196(C).
    8. Dalheimer, Bernhard & Herwartz, Helmut & Lange, Alexander, 2021. "The threat of oil market turmoils to food price stability in Sub-Saharan Africa," Energy Economics, Elsevier, vol. 93(C).
    9. Zeina Alsalman, 2021. "Does the source of oil supply shock matter in explaining the behavior of U.S. consumer spending and sentiment?," Empirical Economics, Springer, vol. 61(3), pages 1491-1518, September.

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    More about this item

    Keywords

    oil supply elasticity; oil demand elasticity; IV estimation; structural VAR; Bayesian inference; oil price; global real activity;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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