Macroeconomic Shocks in an Oil Market VAR

32 Pages Posted: 7 May 2012

See all articles by Marko Melolinna

Marko Melolinna

Bank of Finland - Monetary Policy

Date Written: May 3, 2012


This paper studies oil market and other macroeconomic shocks in a structural vector autoregression with sign restrictions. It introduces a new indicator for oil demand, and uniquely, performs a sign restriction set-up with a penalty function approach in an oil market vector autoregression. The model also allows for macroeconomic shocks in the US. The results underline the importance of the source of an oil shock for its macroeconomic consequences. Oil supply shocks have been less relevant in driving real oil prices, and had less of an effect on US inflation than demand shocks. Overall, the effects of oil shocks on US real activity have been relatively limited, as also highlighted by a counterfactual experiment of recent oil market developments.

Keywords: oil demand shocks, oil supply shocks, business cycle, Bayesian econometrics

JEL Classification: C01, C32, E32

Suggested Citation

Melolinna, Marko, Macroeconomic Shocks in an Oil Market VAR (May 3, 2012). ECB Working Paper No. 1432, Available at SSRN: or

Marko Melolinna (Contact Author)

Bank of Finland - Monetary Policy ( email )

PO Box 160
00101 Helsinki

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