Working Paper: CEPR ID: DP14460
Authors: Lutz Kilian; Xiaoqing Zhou
Abstract: Oil market VAR models have become the standard tool for understanding the evolution of the real price of oil and its impact in the macro economy. As this literature has expanded at a rapid pace, it has become increasingly difficult for mainstream economists to understand the differences between alternative oil market models, let alone the basis for the sometimes divergent conclusions reached in the literature. The purpose of this survey is to provide a guide to this literature. Our focus is on the econometric foundations of the analysis of oil market models with special attention to the identifying assumptions and methods of inference. We not only explain how the workhorse models in this literature have evolved, but also examine alternative oil market VAR models. We help the reader understand why the latter models sometimes generated unconventional, puzzling or erroneous conclusions. Finally, we discuss the construction of extraneous measures of oil demand and oil supply shocks that have been used as external or internal instruments for VAR models.
Keywords: Elasticity; Identification; Model Specification; Bayesian Estimation; Structural VAR; Instruments; Textual Analysis
JEL Codes: Q43; Q41; C36; C52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global demand for oil (Q47) | real price of oil (Q31) |
| oil supply shock (Q43) | real price of oil (Q31) |
| aggregate demand shock (E00) | global economic activity (F69) |
| aggregate demand shock (E00) | real price of oil (Q31) |
| storage demand shocks (R22) | real price of oil (Q31) |