Oil and the Dollar

20 Pages Posted: 19 Jun 2004 Last revised: 9 Jul 2010

See all articles by Paul R. Krugman

Paul R. Krugman

Princeton University - Woodrow Wilson School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 1980

Abstract

This paper develops a simple theoretical model of the effect of an oil price increase on exchange rates. The model shows that the direction of this effect depends on a comparison of the direct balance of payments burden of the higher oil price with the indirect balance of payments benefits of OPEC spending and investment. In the short run, what matters is whether the U.S. share of world oil imports is more or less than its share of OPEC asset holdings; in the long run, whether its share of oil imports is more or less than its share of OPEC imports. Casual empiricism suggests that the initial effect and the long run effect will run in opposite directions: an oil price increase will initially lead to dollar appreciation, but eventually leads to dollar depreciation.

Suggested Citation

Krugman, Paul R., Oil and the Dollar (September 1980). NBER Working Paper No. w0554. Available at SSRN: https://ssrn.com/abstract=264387

Paul R. Krugman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States
609-258-4570 (Phone)
609-258-2809 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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