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Oil Dependence and Economic Instability

Luís Aguiar-Conraria () and Yi Wen ()

No 3/2007, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making fluctuations driven by self-fulfilling expectations easier to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.

Keywords: Indeterminacy; Energy Imports; Externality; Returns to Scale; Sunspots; Self-Fulfilling Expectations. (search for similar items in EconPapers)
JEL-codes: E13 E20 E30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
Date: 2007
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