The Econometrics of Oil Market VAR Models

64 Pages Posted: 3 Mar 2020

See all articles by Lutz Kilian

Lutz Kilian

Federal Reserve Banks - Federal Reserve Bank of Dallas; Centre for Economic Policy Research (CEPR)

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 3 versions of this paper

Date Written: March 2020

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: Bayesian estimation, Elasticity, identification, Model specification, structural VAR, textual analysis

JEL Classification: C36, C52, Q41, Q43

Suggested Citation

Kilian, Lutz and Zhou, Xiaoqing, The Econometrics of Oil Market VAR Models (March 2020). Available at SSRN: https://ssrn.com/abstract=3547393

Lutz Kilian (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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