Oil shocks and external adjustment

Martin Bodenstein, Christopher Erceg and Luca Guerrieri

No 897, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper investigates how oil price shocks affect the trade balance and terms of trade in a two country DSGE model. We show that the response of the external sector depends critically on the structure of financial market risk-sharing. Under incomplete markets, higher oil prices reduce the relative wealth of an oil-importing country, and induce its nonoil terms of trade to deteriorate, and its nonoil trade balance to improve. The magnitude of the nonoil terms of trade response hinges on structural parameters that affect the divergence in wealth effects across oil importers and exporters, including the elasticity of substitution between oil and other inputs in production, and the discount factor. By contrast, cross-country wealth differences effectively disappear under complete markets, with the implication that oil shocks have essentially no effect on the nonoil terms of trade or the nonoil trade balance.

Keywords: Petroleum products - Prices; Balance of trade (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-dge, nep-ene and nep-int
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Oil shocks and external adjustment (2011)
Working Paper: Oil Shocks and External Adjustment (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:897

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