Dynamic Effects of Oil Price Shocks and their Impact on the Current Account

MPRA Paper from University Library of Munich, Germany

Abstract: Our objective is to study the dynamic effects of an oil price shock on economic key variables and on the current account of a small open economy. To do this, we introduce time non-separable preferences in a standard model of a small open economy, where labor supply is endogenous and imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, the current account first deteriorates, and after some time it turns into surplus. We explain this non-monotonic behavior with agents' reluctance to change their consumption expenditures, resulting in an initial trade balance deficit which causes the current account to deteriorate. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into surplus. The model thus provides a plausible explanation of recent empirical findings.

Keywords: oil price shocks; time non-separable preferences; current account dynamics (search for similar items in EconPapers)
JEL-codes: F32 F41 Q43 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-dge, nep-ene and nep-opm
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Citations: View citations in EconPapers (4)

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https://mpra.ub.uni-muenchen.de/54023/1/MPRA_paper_16738.pdf revised version (application/pdf)

Related works:
Journal Article: DYNAMIC EFFECTS OF OIL PRICE SHOCKS AND THEIR IMPACT ON THE CURRENT ACCOUNT (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16738

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