Chapter 3: The Econometrics of Oil Market VAR Models

Oil market VAR models have become the standard tool for understanding the evolution of the real price of oil and its impact on the macro economy. As this literature has expanded at a rapid pace, it has become increasingly difficult for mainstream economists to understand the differences between alternative oil market models, let alone the basis for the sometimes divergent conclusions reached in the literature. The purpose of this survey is to provide a guide to this literature. Our focus is on the econometric foundations of the analysis of oil market models with special attention to the identifying assumptions and methods of inference.