2019
DOI: 10.1016/j.jmoneco.2018.08.004
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Oil price elasticities and oil price fluctuations

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 b… Show more

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Cited by 224 publications
(195 citation statements)
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“…Recent work has shown that decomposing oil price movements into the parts corresponding to oil supply shocks and oil demand shocks depends critically on assumptions about the short-run elasticity of oil supply. Caldara, Cavallo, and Iacoviello (2016) propose an identification scheme that forces the elasticities implied by a VAR model to be consistent with the elasticities reported in published papers. They conclude that oil supply shocks explain 50% of the variation in the price of oil, while global economic activity shocks explain only 30%.…”
Section: Endogeneity Of Oil Pricessupporting
confidence: 56%
“…Recent work has shown that decomposing oil price movements into the parts corresponding to oil supply shocks and oil demand shocks depends critically on assumptions about the short-run elasticity of oil supply. Caldara, Cavallo, and Iacoviello (2016) propose an identification scheme that forces the elasticities implied by a VAR model to be consistent with the elasticities reported in published papers. They conclude that oil supply shocks explain 50% of the variation in the price of oil, while global economic activity shocks explain only 30%.…”
Section: Endogeneity Of Oil Pricessupporting
confidence: 56%
“…In related work, Caldara, Cavallo, and Iacoviello (2019) infer higher oil supply elasticities than KM12 and KM14. They first identify episodes of large country-specific drops in oil production.…”
Section: The Role Of the Prior On The Short-run Supply Elasticitymentioning
confidence: 92%
“…Because the baseline VAR ofCaldara et al (2019) does not include inventories, the target for qp is akin to a demand elasticity in production and not in use. Hence the pair of admissible elasticities is not directly comparable toKilian and Murphy (2014).26 Estimation results using a location parameter of 0.01 result only in a slight reduction in the posterior median for the short-run elasticity of supply.…”
mentioning
confidence: 99%
“…Baumeister and Hamilton (2019) show that seemingly plausible restrictions on oil supply elasticity map into implausible values of oil demand elasticity, and vice versa. Caldara et al (2019) propose to set both elasticities with information outside the VAR setting. The same endogeneity issue can bias our lead-lag correlation and regression estimates.…”
Section: Shifting Supply Behavior Since the Shale Revolutionmentioning
confidence: 99%