No. 632 - Oil supply news in a VAR: Information from financial markets

This paper analyses the macroeconomic effects on the US economy of news about oil supply by estimating a VAR. Information contained in daily quotations of oil futures contracts is exploited to estimate the dynamic path of oil prices following a shock. Hence, differently from the VAR literature on oil shocks, we do not need to rely on recursive identification. Impulse response functions suggest that oil supply disruptions have stagflationary effects on the US economy. Historical decomposition shows that oil shocks have contributed significantly to the US recessions of the last thirty years, but not all exogenous increases in oil prices have induced a recession. Finally, the contribution of oil shocks to inflation fluctuations seems to have declined over time.