Measuring Oil-Price Shocks Using Market-Based Information∗

We study the effects of oil-price shocks on the U.S economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand. jel classification codes: C32, C82, E31, E32, Q43 ∗For helpful suggestions and comments, we thank Michelle Alexopoulos, Mark Bergen, John Fernald, Luca Guerrieri, James Hamilton, Òscar Jordà, Lutz Kilian, Daniel Levy, Andrea Pescatori, Monika Piazzesi, Trevor Reeve, Christina Romer, David Romer, Eric Swanson, Rob Vigfusson, and seminar and conference participants at the Bank of England, Bank of Italy, Federal Reserve Banks of Chicago, Dallas, and San Francisco, Federal Reserve Board, Oxford University, the 2007 SED Annual Meeting, the Monetary Economics workshop at the 2007 NBER Summer Institute, the 2008 SCE Conference, and the 2009 North American Summer Meeting of the Econometric Society. Thien Nguyen, Nina Ozdemir, Michael Simmons, and Tiffany Smith provided excellent research assistance. The views expressed in this paper are solely our responsibility and should not be interpreted as reflecting the views of the Federal Reserve Bank of Dallas, the Federal Reserve Board, or the Federal Reserve System in general. †Corresponding author. Economic Research Department, 2200 North Pearl Street, Dallas, TX 75201; Tel.:+1 (214) 922-5230; Fax:+1 (214) 922-5194; Email: [email protected] ‡Division of International Finance, 20th and C Streets NW, Washington, DC 20551; Tel.:+1 (202) 452-2607; Fax:+1 (202) 452-6424; Email: [email protected]