Structural Interpretation of Vector Autoregressions with Incomplete Information: Revisiting the Role of Oil Supply and Demand Shocks: Comment

32 Pages Posted: 11 Oct 2018

See all articles by Lutz Kilian

Lutz Kilian

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

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: August 02, 2018

Abstract

Recently, Baumeister and Hamilton (henceforth: BH) have argued that existing studies of the global oil market fail to account for uncertainty about their identifying assumptions. They recommend an alternative econometric approach intended to address this concern by formulating priors on the structural model parameters. We demonstrate that in practice BH are unable to parameterize identification uncertainty without falling back on ad hoc prior specifications. They are also unable to show that earlier studies did not impose all relevant identifying information. In fact, to the extent that BH’s substantive conclusions differ from earlier studies, these differences do not reflect their use of a superior econometric methodology, but mainly the imposition of a highly unrealistic prior for the global impact price elasticity of oil supply. Once identification uncertainty about the global price elasticity of oil supply is accounted for by specifying a prior more in line with extraneous evidence and economic theory, the substantive results of earlier oil market studies are reaffirmed. We also refute BH’s claim that existing oil market studies are invalid or not robust. Finally, we explain why the BH method is not a strict generalization of existing methods. It is, in fact, not designed to be applied to state-or-the-art oil market models because key assumptions of the proposed approach are not met in these models.

Keywords: oil market models, structural VAR, identification, oil supply elasticity

JEL Classification: Q430, C320, E320

Suggested Citation

Kilian, Lutz and Zhou, Xiaoqing, Structural Interpretation of Vector Autoregressions with Incomplete Information: Revisiting the Role of Oil Supply and Demand Shocks: Comment (August 02, 2018). CESifo Working Paper Series No. 7166, Available at SSRN: https://ssrn.com/abstract=3251700 or http://dx.doi.org/10.2139/ssrn.3251700

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) ( email )

London
United Kingdom

Xiaoqing Zhou

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

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

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