We study the identification of oil shocks in a structural vector autoregressive (SVAR) model of the oil market. First, we show that the cross-equation restrictions of a SVAR impose a nonlinear relation between the short-run price elasticities of oil supply and oil demand. This relation implies that seemingly plausible restrictions on oil supply elasticity may map into implausible values of the oil demand elasticity, and vice versa. Second, we propose an identification scheme that restricts these elasticities by minimizing the distance between the elasticities allowed by the SVAR and target values that we construct from a survey of relevant studies. Third, we use the identified SVAR to analyze sources and consequences of movements in oil prices. We find that (1) oil supply shocks and global demand shocks explain 50 and 35 percent of oil price fluctuations, respectively; (2) a drop in oil prices driven by supply shocks boosts economic activity in advanced economies, whereas it depresses economic activity in emerging economies; and (3) the selection of oil market elasticities is essential for understanding the source of oil price movements and to measuring the multipliers of oil prices on economic activity.

Recent debate about the pro-cyclical effects of bankCavallo and Majnoni test their hypotheses with a capital requirements has ignored the important role that sample of 1,176 large commercial banks-372 of them bank loan loss provisions play in the overall framework in non-GlO countries-for the period 1988-99. After of minimum capital regulation.controlling for different country-specific macroeconomic It is frequently observed that underprovisioning, due to and institutional features, they find robust evidence inadequate assessment of expected credit losses, aggravates among G10 banks of a positive association between loan the negative effect of minimum capital requirements loss provisions and banks' pre-provision income. Such during recessions because capital must absorb both evidence is not confirmed for non-GlO banks, which on expected and unexpected losses. Moreover, when expected average provision too little in good times and are forced losses are properly reflected in lending rates but not in to increase provisions in bad times. provisioning practices, fluctuations in bank earningsThe econometric evidence shows that the protection of magnify true oscillations in bank profitability.outsiders' claims-the claims of minority shareholders in The relative agency problems faced by different common law countries and of fiscal authorities in stakeholders may help explain the prevailing and often countries with high public debt-on bank income has unsatisfactory institutional arrangements.negative effects on the level of bank provisions.This paper-a product of the Financial Sector Strategy and Policy Department-is part of a larger effort in the department to study the impact of financial regulation on economic development. Copies of the paper are available free from the World Bank,

No abstract

We study the identification of oil shocks in a structural vector autoregressive (SVAR) model of the oil market. First, we show that the cross-equation restrictions of a SVAR impose a nonlinear relation between the short-run price elasticities of oil supply and oil demand. This relation implies that seemingly plausible restrictions on oil supply elasticity may map into implausible values of the oil demand elasticity, and vice versa. Second, we propose an identification scheme that restricts these elasticities by minimizing the distance between the elasticities allowed by the SVAR and target values that we construct from a survey of relevant studies. Third, we use the identified SVAR to analyze sources and consequences of movements in oil prices. We find that (1) oil supply shocks and global demand shocks explain 50 and 35 percent of oil price fluctuations, respectively; (2) a drop in oil prices driven by supply shocks boosts economic activity in advanced economies, whereas it depresses economic activity in emerging economies; and (3) the selection of oil market elasticities is essential for understanding the source of oil price movements and to measuring the multipliers of oil prices on economic activity.