Measuring Oil-Price Shocks Using Market-Based Information

IMF Working Papers, January 1, 2012

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We study the effects of oil-price shocks on the U.S. economy combining narrative and quantitative approaches.
After examining daily oil-related events since 1984, we classify them into various event types.
We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns.
Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years.
In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period.
This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand.

Examination of daily oil-related events since 1984 and classification into event types.
Development of measures of exogenous shocks designed to avoid endogeneity and predictability concerns.
Comparison of narrative/market-based shock measures with traditional VAR approaches.

Subjects: Commodities, Consumer price indexes, Inflation, Oil, Oil prices, Oil production, Prices, Production
Keywords: Consumer price indexes, exogenous oil-price shock, Global, Inflation, Market-Based Information, Middle East, Oil, oil price movement, oil price shock, Oil prices, Oil production, Oil Shocks, oil-price channel, oil-price forecasting equation, oil-price forecasting model, oil-price increase, oil-price indicator, oil-price movement, oil-price shock, price decline, price level, shock measure, VAR Identification, WP

IMF Working Paper by Tao Wu and Michele Cavallo, "Measuring Oil-Price Shocks Using Market-Based Information", January 1, 2012.