World Equilibrium with Oil Price Increases: An Intertemporal Analysis

36 Pages Posted: 9 May 2000 Last revised: 3 Jan 2002

See all articles by Nancy Peregrim Marion

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 1983

Abstract

This paper examines the effect of OPEC price increases on the welfare of a group of oil-importing industrial countries. It also studies how taxes or subsidies on oil imports or capital flows could alter the group's welfare. The analysis is conducted using a general-equilibrium model that describes the behavior of two actors, OPEC and the oil-importing bloc called Industria. The analysis is explicitly intertemporal and takes into account endogenous changes in saving, investment and employment.We show that Industria's welfare is affected not only by direct oil terms of trade effect, but also by changes in the world rate of interest(intertemporal terms of trade effects) and, for rigid wages, changes in employment. Thus Industria gains from the intertemporal terms of trade effect if it is a net borrower and the world rate of interest falls. Precise conditions for whether the world rate of interest falls or rises are given.We also show that Industria may gain from subsidizing oil imports rather than taxing them, in particular if wages are rigid, and that it may gain from restricting international capital mobility.

Suggested Citation

Marion, Nancy P. and Svensson, Lars E.O., World Equilibrium with Oil Price Increases: An Intertemporal Analysis (February 1983). NBER Working Paper No. w1074, Available at SSRN: https://ssrn.com/abstract=228028

Nancy P. Marion (Contact Author)

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
(603) 646-2511 (Phone)

Lars E.O. Svensson

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://larseosvensson.se

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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