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Estimating the Macroeconomic Effects of Oil Supply News

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  • Lorenzo Mori
  • Gert Peersman

Abstract

A common approach for estimating the macroeconomic effects of oil supply news employs SVAR-IV models identified using changes in oil futures prices around OPEC quota announcements as an instrument. However, we show that the reduced-form oil price innovations, structural shocks, and the instrumental variable in these estimations are all Granger-caused by financial variables, indicating informational deficiencies in the VAR model and contamination of the instrument. To resolve these issues, we incorporate financial indicators into the econometrician s information set, yielding significantly different results. These include a sharper short-term output decline, lower and less persistent inflationary effects, and a reversal of the monetary policy response. Our results also show greater stability over time and the disappearance of puzzling responses. Finally, we identify similar issues in other prominent oil-market SVAR models, suggesting that informational deficiencies are a pervasive issue in oil-market research.

Suggested Citation

  • Lorenzo Mori & Gert Peersman, 2024. "Estimating the Macroeconomic Effects of Oil Supply News," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 24/1099, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:24/1099
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    References listed on IDEAS

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    1. Martin Bruns & Helmut Luetkepohl, 2023. "Have the Effects of Shocks to Oil Price Expectations Changed? Evidence from Heteroskedastic Proxy Vector Autoregressions," University of East Anglia School of Economics Working Paper Series 2023-03, School of Economics, University of East Anglia, Norwich, UK..
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    More about this item

    JEL classification:

    • 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
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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