Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices

35 Pages Posted: 8 Dec 2008

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Clara Vega

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2008

Abstract

Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered last in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification.

Keywords: Oil price, gasoline price, news, identification, impulse responses

JEL Classification: C32, E37, Q43

Suggested Citation

Kilian, Lutz and Vega, Clara, Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices (November 21, 2008). FRB International Finance Discussion Paper No. 957. Available at SSRN: https://ssrn.com/abstract=1311873 or http://dx.doi.org/10.2139/ssrn.1311873

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Clara Vega (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/research/staff/vegaclarax.htm

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