where ∗ represents an unrestricted response without any economic motivation. These sign restrictions to identify the structural shocks are consistent with the predictions of our model and broadly follow some earlier empirical studies as we discuss later. However, our study differs in the formulation of the econometric model, types of variables, and structural shocks. The motivation behind the sign restrictions for each shock is as follows.

A positive global supply shock is assumed to be accompanied by higher global output and oil prices but lower global inflation. Global supply shocks typically include supply-driven non-oil disturbances in cross-border value chains, labor, or product markets. For example, a positive global supply shock can be due to an increase in productivity, greater competition across firms, or lower marginal costs of production in general (due to factors other than reductions in oil prices that are captured separately by oil price shocks). This is consistent with the predictions of our dynamic general equilibrium model in which a positive supply shock reduces the marginal cost of non-oil products, which is reflected in falling inflation and rising aggregate output. Since higher productivity drives up wages (and consumption for oil products), the price of oil rises as well.

A positive global demand shock is assumed to be associated with higher global output growth, inflation, interest rates, and oil price growth.<sup>6</sup> These shocks typically represent demand-driven non-monetary disturbances due to changes in factors such as fiscal policy or agents’ saving and investment preferences. A positive global demand shock can be due to, for example, an expansionary fiscal policy and/or an increase in the marginal propensity to consume or invest. In our model, a positive demand shock increases consumption, and thus, output and inflation while putting pressure on oil prices. Monetary policy reacts to these developments by raising interest rates.

A positive global interest rate shock is defined as one that is accompanied by higher global interest rates but lower global inflation and output growth (Uhlig 2017, Fry and Pagan 2011). Global interest rate shocks can be driven by changes in monetary policy or investor risk sentiment.<sup>7</sup> In our model, a contractionary monetary policy that increases the interest rate depresses consumption demand which, in turn, lowers both inflation and output.

> 6 Our identifying assumptions with respect to supply and demand shocks are also consistent with those used by Charnavoki and Dolado (2014) that a negative non-commodity supply shock raises input cost, reduces output and commodity prices, and raises inflation and that a demand shock raises output, inflation, and commodity prices. For similar approaches to the identification of supply and demand shocks, see Gambetti, Pappa, and Canova (2008) and Melolinna (2015).

> 7 The literature often assumes that fluctuations in short-term interest rates reflect factors related to monetary policy and to the risk (term) premium although both types of shocks can affect each other. Bekaert, Engstrom, and Ermolov (2021) trace out the effects of monetary policy on interest rates and contrast them with the effects of shocks to risk aversion and uncertainty that is not driven by monetary policy. Using data for the United States, euro area, and Japan, they find that global risk premium shocks

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