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Oil Shocks, Trade Reallocation, and External Adjustment: The case of of a small open economy

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  • Merino Troncoso, Carlos

Abstract

This paper analyzes the macroeconomic effects of global oil price shocks in a small open economy DSGE framework with an endogenous logistics sector. Using Panama as a case study, we estimate the model using Bayesian techniques and identify exogenous oil supply shocks through fluctuations in global oil prices. We find that oil shocks generate stagflationary dynamics, characterized by higher inflation and lower output. Importantly, higher global shipping costs induce endogenous trade reallocation toward shorter maritime routes, increasing activity through the Panama Canal. This logistics channel partially offsets output losses but does not prevent a decline in welfare due to inflation distortions and consumption volatility. The results highlight the role of trade infrastructure as a partial stabilizer in highly open and dollarized economies, while underscoring the limits of real adjustment mechanisms in the absence of independent monetary policy.

Suggested Citation

  • Merino Troncoso, Carlos, 2026. "Oil Shocks, Trade Reallocation, and External Adjustment: The case of of a small open economy," MPRA Paper 128814, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128814
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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