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DYNAMIC EFFECTS OF OIL PRICE SHOCKS AND THEIR IMPACT ON THE CURRENT ACCOUNT

Published online by Cambridge University Press:  18 March 2013

Stefan F. Schubert
Stefan F. Schubert*
Affiliation:
Free University of Bozen-Bolzano
*
Address correspondence to: Stefan F. Schubert, Free University of Bozen-Bolzano, School of Economics and Management, Piazza Università 1, I-39100 Bozen-Bolzano, Italy; e-mail: StefanFranz.Schubert@unibz.it.
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Abstract

We study the dynamic effects of an oil price shock on key economic variables and on the current account of a small open economy. We introduce time-nonseparable preferences into a standard model of a small open economy, where imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, employment falls and the current account first deteriorates. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into a surplus. The model thus provides a plausible explanation of recent empirical findings.

Keywords

Oil Price ShocksTime Nonseparable PreferencesCurrent Account Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 316 - 337
Copyright
Copyright © Cambridge University Press 2013 

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