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A note on oil dependence and economic instability

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Author Info
Luís Aguiar-Conraria
Yi Wen

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Abstract

We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making fluctuations driven by self-fulfilling expectations easier to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-060.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-060

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Keywords: Petroleum industry and trade Economic stabilization

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  32. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July. [Downloadable!] (restricted)
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