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Oil Prices, Welfare, and the Trade Balance

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  • Lars E. O. Svensson

Abstract

The paper examines welfare effects and the trade balance response to changes in the world oil prices and interest rates for a small oil-importing economy. The trade balance is mainly seen as the difference between saving and investment, and these are derived from intertemporal optimization. It is shown that the welfare effects consist of static terms-of-trade effects, intertemporal terms-of-trade effects, and employment effects. The trade balance deteriorates for temporary oil price increases; whereas its response is ambiguous for permanent oil price increases. For a fall in the world interest rate, the trade balance deteriorates if the economy is a net borrower.

Suggested Citation

  • Lars E. O. Svensson, 1984. "Oil Prices, Welfare, and the Trade Balance," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 649-672.
  • Handle: RePEc:oup:qjecon:v:99:y:1984:i:4:p:649-672.
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    File URL: http://hdl.handle.net/10.2307/1883119
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    Cited by:

    1. Peter Englund & Anders Vredin, 1990. "The current account, supply shocks and accommodative fiscal policy : interpretations of Swedish post-war data," Finnish Economic Papers, Finnish Economic Association, vol. 3(2), pages 89-107, Autumn.
    2. Sebastian Edwards, 1992. "Sequencing and Welfare: Labor Markets and Agriculture," NBER Working Papers 4095, National Bureau of Economic Research, Inc.
    3. Eslamloueyan, Karim & Jafari, Mahboubeh, 2014. "Financial crisis and saving–investment dynamics in the presence of cross-sectional dependence: The case of East Asia," China Economic Review, Elsevier, vol. 30(C), pages 209-220.
    4. Sebastian Edwards, 1989. "On the Sequencing of Structural Reforms," OECD Economics Department Working Papers 70, OECD Publishing.
    5. Serven, Luis, 1999. "Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 337-365.
    6. Eslamloueyan, Karim & Jafari, Mahbobeh, 2010. "Capital mobility, openness, and saving-investment relationship in Asia," Economic Modelling, Elsevier, vol. 27(5), pages 1246-1252, September.
    7. O Okiti, 2003. "Temporary and Permanent Terms of Trade Shocks: A Literature Survey," The School of Economics Discussion Paper Series 0334, Economics, The University of Manchester.
    8. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2011. "Oil shocks and external adjustment," Journal of International Economics, Elsevier, vol. 83(2), pages 168-184, March.
    9. Turnovsky, Stephen J., 1993. "The impact of terms of trade shocks on a small open economy: A stochastic analysis," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 278-297, June.
    10. Sebastian Edwards & Alejandra Cox Edwards, 1990. "Labor Market Distortions and Structural Adjustments in Developing Countries," NBER Working Papers 3346, National Bureau of Economic Research, Inc.
    11. Kim, Sunghyun Henry, 2001. "The saving-investment correlation puzzle is still a puzzle," Journal of International Money and Finance, Elsevier, vol. 20(7), pages 1017-1034, December.
    12. Alberto Petrucci, 2010. "Second-Best Optimal Taxation of Oil and Capital in a Small Open Economy," Working Papers 2010.20, Fondazione Eni Enrico Mattei.

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