External Capital Structures and Oil Price Volatility

Abstract

We assess the extent to which a country's external capital structure can aid in mitigating the macroeconomic impact of oil price shocks. We study two Caribbean economies highly vulnerable to oil price shocks, an oil-importer (Jamaica) and an oil-exporter (Trinidad and Tobago). From a risk-sharing perspective, a desirable external capital structure is one that, through international capital gains and losses, helps offset responses of the current account balance to external shocks. We find that both countries could alter their international portfolio to provide a more effective buffer against such shocks.