Using Financial Markets Information to Identify Oil Supply Shocks in a Restricted VAR

38 Pages Posted: 19 Mar 2008

See all articles by Marko Melolinna

Marko Melolinna

Bank of Finland - Monetary Policy

Date Written: 2008

Abstract

This paper introduces a methodology for identifying oil supply shocks in a restricted VAR system for a small open economy. Financial market information is used to construct an identification scheme that forces the response of the restricted VAR model to an oil shock to be the same as that implied by futures markets. Impulse responses are then calculated by using a bootstrapping procedure for partial identification. The methodology is applied to Finland and Sweden in illustrative examples in a simple 5-variable model. While oil supply shocks have an inflationary effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is more ambiguous.

Keywords: oil futures, partial identification, macroeconomic shocks

JEL Classification: C01, E32, E44

Suggested Citation

Melolinna, Marko, Using Financial Markets Information to Identify Oil Supply Shocks in a Restricted VAR (2008). Bank of Finland Research Discussion Paper No. 9/2008, Available at SSRN: https://ssrn.com/abstract=1107980 or http://dx.doi.org/10.2139/ssrn.1107980

Marko Melolinna (Contact Author)

Bank of Finland - Monetary Policy ( email )

PO Box 160
00101 Helsinki
Finland

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