Monopoly Power in the Oil Market and the Macroeconomy
55 Pages Posted: 26 Oct 2017 Last revised: 26 Jul 2018
Date Written: July 17, 2018
This paper studies macroeconomic consequences of oil price fluctuations caused by innovations in the monopoly power in the oil market. Monopoly power is interpreted as oil producers' ability to charge markups over marginal costs. We propose a novel way to identify markup shocks based on meetings of the OPEC and show their unique macroeconomic consequences compared to supply and demand shocks. In particular, global real economic activity persistently expands when oil producers' monopoly power rises. A general equilibrium model suggests that higher monopoly profits attract investments in oil producing capital which drive down marginal costs and thereby stimulate economic growth.
Keywords: Monopoly, OPEC, Oil Shocks, VAR, DSGE, Real Business Cycle
JEL Classification: C32, E23, E32, L12, L71, Q43
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