Working Paper: CEPR ID: DP18348
Authors: Lutz Kilian
Abstract: It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection. The standard approach has been to sum these daily surprises over the course of a given month when constructing the monthly proxy variable, ignoring the accounting relationship between daily and average monthly price data. In this paper, I provide a new approach to constructing monthly proxies from daily surprises that takes account of this link and revisit the question of how to use OPEC announcements to identify news shocks in VAR models of the global oil market. The proposed approach calls into question the interpretation of the identified shock as oil supply news and implies quantitatively and qualitatively different estimates of the macroeconomic impact of OPEC announcements.
Keywords: proxy; VAR; IV; shock; aggregation; time aggregation; identification; OPEC; supply news; storage; demand; oil; futures; oil price expectations
JEL Codes: C36; C51; E31; E32; E44; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| OPEC announcements (Q38) | positive shocks to oil price expectations (Q47) |
| positive shocks to oil price expectations (Q47) | increase in real price of oil (Q31) |
| positive shocks to oil price expectations (Q47) | increase in global oil inventories (F69) |
| positive shocks to oil price expectations (Q47) | modest decline in oil production (L71) |
| OPEC announcements (Q38) | changes in expectations about future oil supply shortfalls (Q47) |
| changes in expectations about future oil supply shortfalls (Q47) | significant impact on the economy (F69) |
| OPEC announcements (Q38) | broader economic conditions (E66) |