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Oil Dependence and Economic Instability

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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.

Suggested Citation

  • Luís Francisco Aguiar-Conraria & Yi Wen, 2007. "Oil Dependence and Economic Instability," NIPE Working Papers 3/2007, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:3/2007
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    File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2007/NIPE_WP_3_2007.PDF
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    Cited by:

    1. erdogdu, oya safinaz, 2007. "The Effects of Energy Imports: The Case of Turkey," MPRA Paper 5413, University Library of Munich, Germany.
    2. Pereira, Vitor, 2007. "The possible impacts of energy imports in the economic growth of USA
      [Os Possíveis Impactos da Importação de Energia no Crescimento Económico dos EUA]
      ," MPRA Paper 4180, University Library of Munich, Germany.

    More about this item

    Keywords

    Indeterminacy; Energy Imports; Externality; Returns to Scale; Sunspots; Self-Fulfilling Expectations.;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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