Oil Price Movements and the Global Economy: A Model-Based Assessment

NBER Working Paper No. 13792
Issued in February 2008
NBER Program(s):   IFM    ITI

---- Abstract -----

We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labor income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.

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http://www.nber.org/papers/w13792.pdf?new_window=1
http://papers.nber.org/papers/w13792

Created by
Selim Elekdag
International Monetary Fund
700 19th Street
Washington, DC 20431
selekdag@imf.org

Rene Lalonde
Bank of Canada
234 Wellington Street
Ottawa ON Canada K1A 0G9
LALX@bank-banque-canada.ca

Douglas Laxton
International Monetary Fund
700 19th Street
Washington, DC 20431
dlaxton@imf.org

Dirk Muir
Bank of Canada
234 Wellington Street, Ottawa ON Canada K1A 0G9
dmuir@bank-banque-canada.ca

Paolo Pesenti
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
and NBER
paolo.pesenti@ny.frb.org