Why do some researchers include international oil prices in a VAR model for small open economies? My intuition is that international oil prices cannot be a endogenous variable in the context of a small open economy. For example, I don't see how one would justify a two-variable VAR model (say, for international oil price and GDP) for a country like Ghana. Because oil prices are not endogenous for small open economies, right? I mean, Ghana's GDP or its lags do not affect the international price of oil. However, I see in the literature that people still use a VAR model with oil prices as one of the endogenous variables in the model. I am finding it hard to understand how they can do that, and these papers do not state how.

Any help is appreciated.

Accepted answer: Use an SVAR model in this case and put some structure on the shocks and disturbances of the model.

Why do some researchers include international oil prices in a VAR model for small open economies? My intuition is that international oil prices cannot be a endogenous variable in the context of a small open economy. For example, I don't see how one would justify a two-variable VAR model (say, for international oil price and GDP) for a country like Ghana. Because oil prices are not endogenous for small open economies, right? I mean, Ghana's GDP or its lags do not affect the international price of oil. However, I see in the literature that people still use a VAR model with oil prices as one of the endogenous variables in the model. I am finding it hard to understand how they can do that, and these papers do not state how.

Any help is appreciated.

Why do some researchers include international oil prices in a VAR model for small open economies? My intuition is that international oil prices cannot be a endogenous variable in the context of a small open economy. For example, I don't see how one would justify a two-variable VAR model (say, for international oil price and GDP) for a country like Ghana. Because oil prices are not endogenous for small open economies, right? I mean, Ghana's GDP or its lags do not affect the international price of oil. However, I see in the literature that people still use a VAR model with oil prices as one of the endogenous variables in the model. I am finding it hard to understand how they can do that, and these papers do not state how.

Any help is appreciated.

Why do some researchers include international oil prices in a VAR model for small open economies? My intuition is that international oil prices cannot be a endogenous variable in the context of a small open economy. For example, I don't see how one would justify a two-variable VAR model (say, for international oil price and GDP) for a country like Ghana. Because oil prices are not endogenous for small open economies, right? I mean, Ghana's GDP or its lags do not affect the international price of oil. However, I see in the literature that people still use a VAR model with oil prices as one of the endogenous variables in the model. I am finding it hard to understand how they can do that, and these papers do not state how.

Any help is appreciated.

Accepted answer: Use an SVAR model in this case and put some structure on the shocks and disturbances of the model.