Oil Shocks, Trade Reallocation, and External Adjustment: The case of of a small open economy

Carlos Merino Troncoso

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the macroeconomic effects of global oil price shocks in a small open economy DSGE framework with an endogenous logistics sector. Using Panama as a case study, we estimate the model using Bayesian techniques and identify exogenous oil supply shocks through fluctuations in global oil prices. We find that oil shocks generate stagflationary dynamics, characterized by higher inflation and lower output. Importantly, higher global shipping costs induce endogenous trade reallocation toward shorter maritime routes, increasing activity through the Panama Canal. This logistics channel partially offsets output losses but does not prevent a decline in welfare due to inflation distortions and consumption volatility. The results highlight the role of trade infrastructure as a partial stabilizer in highly open and dollarized economies, while underscoring the limits of real adjustment mechanisms in the absence of independent monetary policy.

Keywords: Oil price shocks; DSGE model; small open economy; trade reallocation; logistics sector; Panama Canal; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E32 F41 Q43 (search for similar items in EconPapers)
Date: 2026-04-20
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:128814

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