Estimating the Macroeconomic Effects of Oil Supply News

Abstract We show that structural oil-market shocks identified in prominent SVAR models, as well as high-frequency oil price changes around OPEC announcements, are predictable, indicating informational deficiencies in standard oil-market VARs and contamination of commonly used instrumental variables. We resolve these identification problems for oil supply news shocks by augmenting the econometrician’s information set with financial indicators, yielding markedly different results: the shocks induce a sharper short-run output contraction, are less inflationary, contribute less to oil price variation, exhibit greater stability over time, and account for a substantial share of S&P 500 volatility.