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Oil Price Movements and the Global Economy: A Model-Based Assessment

Selim Elekdag, Rene Lalonde, Douglas Laxton (), Dirk Muir () and Paolo Pesenti

No 6700, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labour income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.

Keywords: DSGE models; Oil prices; World economy (search for similar items in EconPapers)
JEL-codes: E66 F32 F47 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene, nep-mac and nep-opm
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Journal Article: Oil Price Movements and the Global Economy: A Model-Based Assessment (2008) Downloads
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Working Paper: Oil Price Movements and the Global Economy: A Model-Based Assessment (2007) Downloads
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