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The effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approachThe effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approach

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  • Dominik Bertsche

    (Department of Economics, University of Konstanz)

Abstract

Oil supply shocks have been found to be important drivers of US business cycles. The literature studies the effects of two types of shortfalls in supply separately: a ‘flow’ supply shock revealing an immediate drop in production as well as a ‘news’ shock associated with unanticipated shifts in future oil production. In this paper, I simultaneously identify both kinds of supply shocks allowing me to assess their relative importance within one model. For this purpose, I develop a factor-augmented vector autoregressive model that is identified by external instruments (Proxy-FAVAR). The framework ensures that the identified shocks are orthogonal to each other while also using a rich information set and a credible identification scheme. My results suggest that these shocks have substantially distinguishable effects: While news shocks clearly dominate the reaction of the oil price, flow supply surprises have more pronounced effects on many macroeconomic indicators and financial variables.

Suggested Citation

  • Dominik Bertsche, 2019. "The effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approachThe effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approach," Working Paper Series of the Department of Economics, University of Konstanz 2019-06, Department of Economics, University of Konstanz.
    • Handle: RePEc:knz:dpteco:1906
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    Cited by:

    1. Robin Braun & Ralf Brüggemann, 2017. "Identification of SVAR Models by Combining Sign Restrictions With External Instruments," Working Paper Series of the Department of Economics, University of Konstanz 2017-07, Department of Economics, University of Konstanz.
    2. Robin Braun & Ralf Brüggemann, 2020. "Identification of SVAR Models by Combining Sign Restrictions With External Instruments," Working Paper Series of the Department of Economics, University of Konstanz 2020-01, Department of Economics, University of Konstanz.

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    More about this item

    Keywords

    Oil market; Factor-Augmented Vector Autoregression (FAVAR); Identification via External Instruments; Bayesian Inference;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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