Abstract
This paper studies oil market and other macroeconomic shocks in a structural vector autoregression with sign restrictions. It introduces a new indicator for oil demand, and uniquely, performs a sign restriction set-up with a penalty function approach in an oil market vector autoregression. The model also allows for macroeconomic shocks in the US. The results underline the importance of the source of an oil shock for its macroeconomic consequences. Oil supply shocks have been less relevant in driving real oil prices, and had less of an effect on US inflation than demand shocks. Overall, the effects of oil shocks on US real activity have been relatively limited, as also highlighted by a counterfactual experiment of recent oil market developments.
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