Oil Price Movements and the Global Economy: A Model-Based Assessment
Selim Ali Elekdag
International Monetary Fund (IMF) - Policy Development and Review Department
Government of Canada - International Relations Department
Bank of Canada
International Monetary Fund (IMF) - Research Department
Paolo A. Pesenti
Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. DP6700
We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labour income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.
Number of Pages in PDF File: 51
Keywords: DSGE models, Oil prices, World economy
JEL Classification: E66, F32, F47working papers series
Date posted: June 10, 2008
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