Supply and demand

Econometrics

Bayesian inference

Microeconomics

Oil price

Monetary policy

Demand shock

Artificial intelligence

Economics

Supply shock

Bayesian probability

Biology

Macroeconomics

Monetary economics

Inference

Computer science

Botany

Identification (biology)

Vector autoregression

Structural vector autoregression

Computer network

Bayesian vector autoregression

American Economic Review

Traditional approaches to structural vector autoregressions (VARs) can be viewed as special cases of Bayesian inference arising from very strong prior beliefs. These methods can be generalized with a less restrictive formulation that incorporates uncertainty about the identifying assumptions themselves. We use this approach to revisit the importance of shocks to oil supply and demand. Supply disruptions turn out to be a bigger factor in historical oil price movements and inventory accumulation a smaller factor than implied by earlier estimates. Supply shocks lead to a reduction in global economic activity after a significant lag, whereas shocks to oil demand do not. (JEL C32, L71, Q35, Q43)

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