Oil prices and their effect on potential output

Angel Estrada and Pablo Hernández de Cos

Applied Economics Letters, 2012, vol. 19, issue 3, 207-214

Abstract: This article describes some of the mechanisms by which oil price fluctuations produce changes in the long-run growth of the economy. The analysis suggests that a (permanent) increase in oil prices can significantly reduce potential output. From an economic policy point of view, this effect may be more marked when competition in the product markets is low or when wage indexation is high; thus, reforms aiming to increase competition and improve wage-setting mechanisms help to reduce the negative effects of higher oil prices on long-run economic growth.

Date: 2012
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DOI: 10.1080/13504851.2011.572833

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