Facts and Fiction in Oil Market Modeling

Center for Financial Studies Working Paper No. 661, 2021

49 Pages Posted:

See all articles by Lutz Kilian

Lutz Kilian

Federal Reserve Banks - Federal Reserve Bank of Dallas; Centre for Economic Policy Research (CEPR)

Date Written: September 18, 2021

Abstract

A series of recent articles has called into question the validity of VAR models of the global market for crude oil. These studies seek to replace existing oil market models by structural VAR models of their own based on different data, different identifying assumptions, and a different econometric approach. Their main aim has been to revise the consensus in the literature that oil demand shocks are a more important determinant of oil price fluctuations than oil supply shocks. Substantial progress has been made in recent years in sorting out the pros and cons of the underlying econometric methodologies and data in this debate, and in separating claims that are supported by empirical evidence from claims that are not. The purpose of this paper is to take stock of the VAR literature on global oil markets and to synthesize what we have learned. Combining this evidence with new data and analysis, I make the case that the concerns regarding the existing VAR oil market literature have been overstated and that the results from these models are quite robust to changes in the model specification.

Keywords: Q43, Q41, C36, C52

JEL Classification: Elasticity, structural VAR, Bayesian inference, oil price, global real activity, oil inventories

Suggested Citation

Kilian, Lutz, Facts and Fiction in Oil Market Modeling (September 18, 2021). Center for Financial Studies Working Paper No. 661, 2021, Available at SSRN: https://ssrn.com/abstract=

Lutz Kilian (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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