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Measuring Oil-Price Shocks Using Market-Based Information

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  • Mr. Tao Wu
  • Mr. Michele Cavallo

Abstract

We study the effects of oil-price shocks on the U.S. economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand.

Suggested Citation

  • Mr. Tao Wu & Mr. Michele Cavallo, 2012. "Measuring Oil-Price Shocks Using Market-Based Information," IMF Working Papers 2012/019, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/019
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    References listed on IDEAS

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    Cited by:

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    2. Diego R. Känzig, 2021. "The Macroeconomic Effects of Oil Supply News: Evidence from OPEC Announcements," American Economic Review, American Economic Association, vol. 111(4), pages 1092-1125, April.
    3. Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2021. "Can large trade shocks cause crises? The case of the Finnish–Soviet trade collapse," Journal of International Economics, Elsevier, vol. 131(C).
    4. Francesca Rondina, 2017. "The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy," Working Papers 1709E, University of Ottawa, Department of Economics.
    5. Geun-Young Kim & Hail Park & Peter Tillmann, 2016. "The Spillover Effects of U.S. Monetary Policy on Emerging Market Economies: Breaks, Asymmetries and Fundamentals," Working Papers 2016-1, Economic Research Institute, Bank of Korea.
    6. Jamshed Y. Uppal & Syeda Rabab Mudakkar, 2014. "Mitigating Vulnerability to Oil Price Risk— Applicability of Risk Models to Pakistan’s Energy Problem," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(3), pages 293-308.
    7. Lyu, Yifei, 2021. "Accounting for the declining economic effects of oil price shocks," Energy Economics, Elsevier, vol. 96(C).
    8. Lutz Kilian & Xiaoqing Zhou, 2023. "The Econometrics of Oil Market VAR Models," Advances in Econometrics, in: Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications, volume 45, pages 65-95, Emerald Group Publishing Limited.
    9. B., Anand & Paul, Sunil, 2021. "Oil shocks and stock market: Revisiting the dynamics," Energy Economics, Elsevier, vol. 96(C).
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    11. Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2021. "Can large trade shocks cause crises? The case of the Finnish–Soviet trade collapse," Journal of International Economics, Elsevier, vol. 131(C).

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