The effect of oil prices on potential growth

Angel Estrada and Pablo Hernández de Cos

No 902, Occasional Papers from Banco de España

Abstract: Oil prices have fluctuated considerably in the last few years, with major effects on the economy. This paper describes some of the mechanisms by which these fluctuations produce changes in the long-run growth of the economy. In particular, it analyses the effect on productivity, capital stock and structural unemployment. 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.

Keywords: oil price; potential output; production function (search for similar items in EconPapers)
JEL-codes: J64 O13 O47 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009-02
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:opaper:0902

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