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Oil Prices and the World Economy

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  • Ray Barrell

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  • Olga Pomerantz

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Abstract

High oil prices have been associated with bouts of inflation and economic instability over the last 30 years. Consequently, the rise of oil prices in recent months has generated concern. We argue that the inflationary consequences of a rise in oil prices depend upon the policy response of the monetary authorities. They can ameliorate the short-term impacts on output, but only at the cost of higher inflation. In the short term, the size and distribution of output effects from an increase in oil prices depends on the intensity of oil use in production and on the speed at which oil producers spend their revenue. In the medium term, higher oil prices change the terms of trade between the OECD and the rest of the world and hence reduce the equilibrium level of output within the OECD. In this paper the authors first discuss oil market developments and survey previous studies on the impacts of oil price increases. In a next step, the NiGEM model is used to evaluate the impact of temporary and permanent rises in oil prices on the world economy under various policy responses, and the impact of a decline in the speed of oil revenue recycling is analyzed.

Suggested Citation

  • Ray Barrell & Olga Pomerantz, 2004. "Oil Prices and the World Economy," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 152-177.
  • Handle: RePEc:onb:oenbfi:y:2004:i:1:b:5
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    File URL: https://www.oenb.at/dam/jcr:2401c1b1-e9d5-43ac-88ad-be41ebfbb260/oil_prices_tcm16-20271.pdf
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    References listed on IDEAS

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    1. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 221-222, October.
    2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    3. Barrell, Ray & Becker, Bettina & Byrne, Joseph & Gottschalk, Sylvia & Hurst, Ian & van Welsum, Desiree, 2004. "Macroeconomic policy in Europe: experiments with monetary responses and fiscal impulses," Economic Modelling, Elsevier, vol. 21(5), pages 877-931, September.
    4. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    5. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
    6. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    7. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
    8. Ray Barrell & Professor E. Philip Davis, 2004. "Consumption, Financial and Real Wealth in the G-5 (revised December 2004)," National Institute of Economic and Social Research (NIESR) Discussion Papers 232, National Institute of Economic and Social Research.
    9. Benjamin Hunt & Peter Isard & Douglas Laxton, 2002. "The Macroeconomic Effects of Higher Oil Prices," National Institute Economic Review, National Institute of Economic and Social Research, vol. 179(1), pages 87-103, January.
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    Cited by:

    1. Hassan, Syeda Anam & Zaman, Khalid, 2012. "Effect of oil prices on trade balance: New insights into the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2125-2143.
    2. Beirne, John & Beulen, Christian & Liu, Guy & Mirzaei, Ali, 2013. "Global oil prices and the impact of China," China Economic Review, Elsevier, vol. 27(C), pages 37-51.
    3. Ruiz, Juan, 2004. "Causas y consecuencias de la evolución reciente del precio del petróleo," MPRA Paper 431, University Library of Munich, Germany.
    4. Mohanty, Sunil & Nandha, Mohan & Bota, Gabor, 2010. "Oil shocks and stock returns: The case of the Central and Eastern European (CEE) oil and gas sectors," Emerging Markets Review, Elsevier, vol. 11(4), pages 358-372, December.
    5. Marcelo Sánchez, 2011. "Oil shocks and endogenous markups: results from an estimated euro area DSGE model," International Economics and Economic Policy, Springer, vol. 8(3), pages 247-273, September.

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