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Using financial markets information to identify oil supply shocks in a restricted VAR

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  • Melolinna, Marko

Abstract

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

Suggested Citation

  • Melolinna, Marko, 2008. "Using financial markets information to identify oil supply shocks in a restricted VAR," Bank of Finland Research Discussion Papers 9/2008, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2008_009
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    References listed on IDEAS

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    More about this item

    Keywords

    oil futures; partial identification; macroeconomic shocks;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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