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Oil and the Dollar

  • Paul R. Krugman

This paper develops a simple theoretical model of the effect of an oil price increase on exchange rates. The model shows that the direction of this effect depends on a comparison of the direct balance of payments burden of the higher oil price with the indirect balance of payments benefits of OPEC spending and investment. In the short run, what matters is whether the U.S. share of world oil imports is more or less than its share of OPEC asset holdings; in the long run, whether its share of oil imports is more or less than its share of OPEC imports. Casual empiricism suggests that the initial effect and the long run effect will run in opposite directions: an oil price increase will initially lead to dollar appreciation, but eventually leads to dollar depreciation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0554.

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Date of creation: Sep 1980
Date of revision:
Publication status: published as Krugman, Paul. "Oil and the Dollar." Economic Interdependence Under Flexible Exchange Rates, edited by J. Bhandari and B. Putnam, pp. 179-190. Cambridge: Massachusetts Institute of Technology, 1983.
Handle: RePEc:nbr:nberwo:0554
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  1. Obstfeld, Maurice, 1980. "Intermediate imports, the terms of trade, and the dynamics of the exchange rate and current account," Journal of International Economics, Elsevier, vol. 10(4), pages 461-480, November.
  2. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 208-17, May.
  3. Buiter, Willem H, 1978. "Short-run and Long-run Effects of External Disturbances under a Floating Exchange Rate," Economica, London School of Economics and Political Science, vol. 45(179), pages 251-72, August.
  4. Pentti J.K. Kouri, 1978. "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model," Cowles Foundation Discussion Papers 510, Cowles Foundation for Research in Economics, Yale University.
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