Oil Price Movements and the Global Economy: A Model-Based Assessment

51 Pages Posted: 10 Jun 2008

See all articles by Selim Ali Elekdag

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

Rene Lalonde

International Monetary Fund (IMF) - Research Department

Dirk Muir

Bank of Canada

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

Abstract

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.

Keywords: DSGE models, Oil prices, World economy

JEL Classification: E66, F32, F47

Suggested Citation

Elekdag, Selim Ali and Lalonde, René and Muir, Dirk and Laxton, Douglas and Pesenti, Paolo A., Oil Price Movements and the Global Economy: A Model-Based Assessment (February 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1141606

Selim Ali Elekdag (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

René Lalonde

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Dirk Muir

Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Paolo A. Pesenti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5493 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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