DP6830 Oil and the Macroeconomy: A Structural VAR Analysis with Sign Restrictions

Author(s): Francesco Lippi , Andrea Nobili

Publication Date: May 2008

Keyword(s): Business cycle , Oil prices , Structural VAR , Sign Restrictions

JEL(s): C32 , E3 , F4

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6830.asp.asp

We consider an economy where the oil price, industrial production, and other macroeconomic variables fluctuate in response to a variety of fundamental shocks. We estimate the effects of different structural shocks using robust sign restrictions suggested by theory using US data for the 1973-2007 period. The estimates show that identifying the shock underlying the oil price change is important to predict the sign and the magnitude of its correlates with the US production. The results offer a natural explanation for the smaller correlation between oil prices and US production in the recent years compared to the seventies.