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

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  • Selim Elekdag
  • Rene Lalonde
  • Douglas Laxton
  • Dirk Muir
  • Paolo Pesenti

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13792.

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Date of creation: Feb 2008
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Handle: RePEc:nbr:nberwo:13792

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References

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  1. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2006. "Would protectionism defuse global imbalances and spur economic activity?: a scenario analysis," Staff Reports 268, Federal Reserve Bank of New York.
  2. Coenen, Günter & McAdam, Peter & Straub, Roland, 2007. "Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model," Working Paper Series 0747, European Central Bank.
  3. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2005. "Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing," NBER Working Papers 11583, National Bureau of Economic Research, Inc.
  4. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  5. Paul Fenton & Stephen Murchison, 2006. "ToTEM: The Bank of Canada's New Projection and Policy-Analysis Model," Bank of Canada Review, Bank of Canada, vol. 2006(Autumn), pages 5-18.
  6. Bayoumi, Tamim & Laxton, Douglas & Pesenti, Paolo, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," Working Paper Series 0341, European Central Bank.
  7. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  8. Juillard, Michel & Karam, Philippe & Laxton, Douglas & Pesenti, Paolo, 2006. "Welfare-based monetary policy rules in an estimated DSGE model of the US economy," Working Paper Series 0613, European Central Bank.
  9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  10. Rene Lalonde & Dirk Muir, 2007. "The Bank of Canada's Version of the Global Economy Model (BoC-GEM)," Technical Reports 98, Bank of Canada.
  11. Patrick Perrier, 2005. "La fonction de production et les données canadiennes," Working Papers 05-20, Bank of Canada.
  12. Sébastien Jean & Giuseppe Nicoletti, 2004. "Regulation and Wage Premia," Working Papers 2004-12, CEPII research center.
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Cited by:
  1. Özbek, Levent & Özlale, Ümit, 2010. "Analysis of real oil prices via trend-cycle decomposition," Energy Policy, Elsevier, vol. 38(7), pages 3676-3683, July.
  2. Jan J. J. Groen & Paolo A. Pesenti, 2010. "Commodity prices, commodity currencies, and global economic developments," NBER Working Papers 15743, National Bureau of Economic Research, Inc.
  3. Razvan Tudor, 2009. "Evidence of unspanned stochastic volatility in crude-oil market," Advances in Economic and Financial Research - DOFIN Working Paper Series 33, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  4. A. Malliaris & Mary Malliaris, 2013. "Are oil, gold and the euro inter-related? Time series and neural network analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 1-14, January.
  5. Ratti, Ronald A & Vespignani, Joaquin L., 2012. "Crude Oil Prices and Liquidity, the BRIC and G3 countries," Working Papers 15727, University of Tasmania, School of Economics and Finance, revised 17 Dec 2012.
  6. Bazhanov, Andrei, 2008. "Sustainable growth in a resource-based economy: the extraction-saving relationship," MPRA Paper 12350, University Library of Munich, Germany.
  7. Anton Nakov & Andrea Pescatori, 2007. "Inflation-output gap trade-off with a dominant oil supplier," Banco de Espa�a Working Papers 0723, Banco de Espa�a.
  8. Bazhanov, Andrei, 2008. "Sustainable growth: The extraction-saving relationship," MPRA Paper 9911, University Library of Munich, Germany.
  9. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2010. "On the Sources of Oil Price Fluctuations (Petrol Fiyatlarindaki Dalgalanmalarin Kaynaklari)," Working Papers 1005, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  10. Selim Elekdag & Dirk Muir, 2013. "Trade Linkages, Balance Sheets, and Spillovers: The Germany-Central European Supply Chain," IMF Working Papers 13/210, International Monetary Fund.
  11. René Lalonde & Philipp Maier & Dirk Muir, 2009. "Emerging Asia's Impact on Food and Oil Prices: A Model-Based Analysis," Discussion Papers 09-3, Bank of Canada.
  12. Donald Coletti & René Lalonde & Paul Masson & Dirk Muir & Stephen Snudden, 2012. "Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting," Working Papers 12-16, Bank of Canada.
  13. Rene Lalonde & Dirk Muir, 2007. "The Bank of Canada's Version of the Global Economy Model (BoC-GEM)," Technical Reports 98, Bank of Canada.
  14. Juan Pablo Medina & Pablo García, 2009. "A Simple Global Perspective on the US Slowdown, Boom-Bust Cycles and the Rise of Protectionism," Working Papers Central Bank of Chile 529, Central Bank of Chile.

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