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

Marko Melolinna ()
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Marko Melolinna: Bank of Finland, Monetary Policy and Research Department

Finnish Economic Papers, 2011, vol. 24, issue 1, 33-54

Abstract: This paper introduces a methodology for identifying oil supply shocks in to a small open economy. Financial market information is used to construct an identification scheme that forces the response to an oil shock of the restricted VAR model to be the same as that implied by futures markets. Due to the identification scheme, the model is only partially identified, and confidence intervals for impulse responses are calculated by using a bootstrapping procedure. The methodology is applied in illustrative examples to Finland and Sweden in a simple 5-variable model that includes key domestic and international macroeconomic variables. While oil supply shocks have an effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is ambiguous.

JEL-codes: C01 E32 E44 (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:fep:journl:v:24:y:2011:i:1:p:33-54