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The impact of oil prices on an oil-importing developing economy

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  • Schubert, Stefan F.
  • Turnovsky, Stephen J.

Abstract

This paper analyzes the impact of an increase in the price of oil on a small developing economy. We consider the extent to which the impacts of oil price shocks depend upon the economy's internal production structure and its access to the world financial market, and find that the long-run impact depends much more on the former than the latter. Two critical quantities summarizing the long-run effects are (i) the relative share of oil to labor in output and (ii) the elasticity of substitution in production. We supplement the formal analysis with numerical simulations, thereby enabling us to characterize the short-run dynamics. Overall, the simulations can replicate much of the empirical evidence used to characterize the effects of the recent oil price increases on the economy. They also highlight the sensitivity of the effect of the oil price to the elasticity of substitution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 94 (2011)
Issue (Month): 1 (January)
Pages: 18-29

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Handle: RePEc:eee:deveco:v:94:y:2011:i:1:p:18-29

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Oil price Dynamics Developing economy;

References

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  1. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Imran Shah, 2012. "Revisiting the Dynamic Effects of Oil Price Shock on Small Developing Economies," Bristol Economics Discussion Papers 12/626, Department of Economics, University of Bristol, UK.
  2. Marc Pourroy & Benjamin Carton & Dramane Coulibaly, 2012. "Food Prices and Inflation Targeting in Emerging Economies," Working Papers 2012-33, CEPII research center.
  3. Burkhard Heer & Stefan Franz Schubert, 2011. "Unemployment and Debt Dynamics in a Highly Indebted Small Open Economy," CESifo Working Paper Series 3497, CESifo Group Munich.
  4. Stefan Schubert & Stephen Turnovsky, 2011. "The Impact of Energy Prices on Growth and Welfare in a Developing Open Economy," Open Economies Review, Springer, vol. 22(3), pages 365-386, July.
  5. Chai, Jian & Guo, Ju-E. & Meng, Lei & Wang, Shou-Yang, 2011. "Exploring the core factors and its dynamic effects on oil price: An application on path analysis and BVAR-TVP model," Energy Policy, Elsevier, vol. 39(12), pages 8022-8036.
  6. Marc Pourroy & Benjamin Carton & Dramane Coulibaly, 2012. "Food Prices and Inflation Targeting in Emerging Economies," Post-Print halshs-00768906, HAL.
  7. Al-mulali, Usama, 2010. "The Impact of Oil Prices on the Exchange Rate and Economic Growth in Norway," MPRA Paper 24447, University Library of Munich, Germany.

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