A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and EconomicsThis paper investigates the contribution of oil supply, global activity and precautionary
oil-demand innovations for the major episodes of increasing oil prices and US
macroeconomic fluctuations. The empirical approach employed is based on the
recursively identified VAR model of the crude oil market proposed in Kilian (2008).
The estimated results attribute the 2002-2008 oil price increase to global activity and to
precautionary demand shocks (during the 2004-2006 period). Furthermore, based on the
responses of US industrial production and producer prices, the distinct innovations are
shown to produce different macroeconomic effects. Industrial production, in particular,
is shown to respond positively and significantly to global activity shocks in the shortrun, complementing and reinforcing Kilian’s explanation for the thriving behavior of
the US economy between 2002 and 2008. Finally, evidence supporting the relevance of
Blanchard and Galí’s structural change hypothesis is provided
