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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

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Keywords: Oil price Dynamics Developing economy;

References

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Citations

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Cited by:
  1. Alfredo Marvão Pereira & Rui M. Pereira, 2012. "Fossil Fuel Prices and the Economic and Budgetary Challenges of a Small Energy-Importing Economy: The Case of Portugal," Working Papers 115, Department of Economics, College of William and Mary.
  2. Marc Pourroy & Benjamin Carton & Dramane Coulibaly, 2013. "Food Prices and Inflation Targeting in Emerging Economies," EconomiX Working Papers 2013-7, University of Paris West - Nanterre la Défense, EconomiX.
  3. repec:hal:journl:halshs-00768906 is not listed on IDEAS
  4. 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.
  5. 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.
  6. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1392-1413.
  7. 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.
  8. Dirk-Jan van de Ven & Roger Fouquet, 2014. "Historical energy price shocks and their changing effects on the economy," Grantham Research Institute on Climate Change and the Environment Working Papers 153, Grantham Research Institute on Climate Change and the Environment.
  9. 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.

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