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Working Paper
Do oil endowment and productivity matter for accumulation of international reserves?
Fatum, Rasmus; Zhu, Guozhong; Hui, Wenjie (2016-12-01)
We develop a dynamic stochastic optimization model with oil price shocks to show that countries with certain combinations of oil endowment and productivity have strong precautionary incentives to accumulate foreign reserves in response to oil price shocks. Using the Simulated Method of Moments to estimate the model we demonstrate how oil price shocks are absorbed by changes in foreign reserves which, in turn, leads to less variation in aggregate consumption. Along with productivity and oil endowment, we also consider as determinants of reserves holding conventional variables such as trade- ...
Globalization Institute Working Papers , Paper 291

Working Paper
How Times Have Changed: The Impact of the 2026 Iran War on the U.S. Economy
Kilian, Lutz; Plante, Michael D.; Richter, Alexander W. (2026-06-23)
The 2026 Iran war has raised the question of how exposed the U.S. economy is to geopolitical oil supply disruptions. It is widely believed that the U.S. economy has become less vulnerable to such disruptions as it has reduced its dependence on oil and changed from a major net oil importer to a net oil exporter. We develop a two-country model of the global economy with large geopolitical oil supply disruptions that distinguishes between the U.S. economy and the rest of the world. We find that the response of U.S. real GDP growth to the disruption in global oil supplies today is only ...
Working Papers , Paper 2615

Working Paper
The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23
Kilian, Lutz; Zhou, Xiaoqing (2021-11-19)
Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, but only ...
Working Papers , Paper 2116

Working Paper
The Role of Oil Price Shocks in Causing U.S. Recessions
Kilian, Lutz; Vigfusson, Robert J. (2014-08-20)
Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide a formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of ...
International Finance Discussion Papers , Paper 1114

Working Paper
Geopolitical Oil Price Risk and Economic Fluctuations
Kilian, Lutz; Plante, Michael D.; Richter, Alexander W. (2026-03-02)
Market participants and policymakers are concerned about major oil production shortfalls driven by geopolitical events. Even when such events never materialize, unanticipated increases in the probability of a production shortfall may generate a surge in the price of oil and oil price uncertainty. We provide the first systematic account of the quantitative importance of time-varying geopolitical risk to oil production for the global economy. We show that a 20 percentage point increase in the probability of a 5% shortfall in oil production causes a 0.12% reduction in output. When considering a ...
Working Papers , Paper 2403

Working Paper
What the Iran War Teaches Us about the Price Elasticity of Oil Supply
Kilian, Lutz; Patel, Kunal (2026-08-06)
We draw on evidence from the 2026 Iran War to assess the validity of estimates of the short-run price elasticity of oil supply reported in the literature. Our analysis confirms that the one-month and one-quarter U.S. oil supply elasticity is effectively zero, consistent with estimates in Newell and Prest (2019). The data strongly reject the much higher elasticity estimates reported by more recent studies. This finding is consistent with evidence from surveys of oil company executives and with industry data about how long it takes to complete a well and start pumping oil. It is also consistent ...
Working Papers , Paper 2625

Working Paper
Semiparametric Local Projections
Kelanemer Holban, Iones; Kilian, Lutz; Gonçalves, Sílvia; Pesavento, Elena; Herrera, Ana María (2026-06-30)
We propose a semiparametric local projection estimator of nonlinear impulse response functions for a broad class of structural dynamic models relevant for applied macroeconomics, including models with nonlinearly transformed regressors, state dependent coefficients and nonlinear interactions between shocks and state variables. The estimator is based on a doubly robust moment condition that identifies the average response function as a linear functional of a nonparametric conditional mean, augmented by a density ratio that captures the effect of shifting the shock of interest. We combine this ...
Working Papers , Paper 2616

Working Paper
Impulse Response Diagnostics for Priors on Parameters in Structural Vector Autoregressions
Kilian, Lutz (2025-02-25)
Structural impulse response functions may be estimated based on priors about the parameters of the structural VAR presentation. Even when such priors appear seemingly reasonable, they may imply an unintentionally informative prior for the structural impulse responses. Rather than pretending that the posterior of the impulse responses does not depend on this prior, the proposal in this paper is to verify that the prior distribution of the vector of impulse responses of interest is not unintentionally informative. Moreover, if the impulse response prior is intentionally informative, this point ...
Working Papers , Paper 2507

Working Paper
Facts and Fiction in Oil Market Modeling
Kilian, Lutz (2020-12-21)
A series of recent articles has called into question the validity of VAR models of the global market for crude oil. These studies seek to replace existing oil market models by structural VAR models of their own based on different data, different identifying assumptions, and a different econometric approach. Their main aim has been to revise the consensus in the literature that oil demand shocks are a more important determinant of oil price fluctuations than oil supply shocks. Substantial progress has been made in recent years in sorting out the pros and cons of the underlying econometric ...
Working Papers , Paper 1907

Working Paper
Fuel subsidies, the oil market and the world economy
Plante, Michael D.; Balke, Nathan S.; Yücel, Mine K. (2014-08-01)
This paper studies the e ffects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil producing countries with fuel subsidies where retail fuel prices are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing ...
Working Papers , Paper 1407

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