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

Dominik Bertsche ()
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Dominik Bertsche: Department of Economics, University of Konstanz

No 2019-06, Working Paper Series of the Department of Economics, University of Konstanz from 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.

Keywords: Oil market; Factor-Augmented Vector Autoregression (FAVAR); Identification via External Instruments; Bayesian Inference (search for similar items in EconPapers)
JEL-codes: C32 C36 C38 Q43 (search for similar items in EconPapers)
Date: 2019-12-12
New Economics Papers: this item is included in nep-ene and nep-mac
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Citations: View citations in EconPapers (2)

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