Working Paper: CEPR ID: DP7015
Authors: Lutz Kilian; Clara Vega
Abstract: Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered ast in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification.
Keywords: Gasoline Price; Identification; Impulse Responses; News; Oil Price
JEL Codes: C32; E37; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic news (E60) | energy prices (Q41) |
| macroeconomic aggregates (E10) | energy prices (Q41) |
| forward-looking news variables (G14) | gasoline prices (L90) |