Working Paper: CEPR ID: DP65
Authors: Sweder van Wijnbergen
Abstract: We use an intertemporal model incorporating short-run labour and goods markets disequilibrium to analyse the consequences of oil price shocks for unemployment, investment and the current account. A dominant transfer element leads to Keynesian unemployment now and deterioration tomorrow in the final-goods terms of trade. A dominant supply-shock element leads to classical unemployment now and an improvement tomorrow in the final-goods terms of trade. Investment falls if there is classical unemployment but increases in the K-region under Putty-Clay technology. Current account deficits are larger in the K-region than in the C-region. If world interest rates fall, investment accelerates in the K-region but not in the C-region. We use these results to explain observed differences in response to oil shocks.
Keywords: stabilization policy; factor price changes; disequilibrium; keynesian unemployment; classical unemployment
JEL Codes: 023; 130; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent increase in oil prices (Q31) | short-run unemployment (J64) |
| Dominant transfer effect (F16) | keynesian unemployment (J64) |
| Dominant supply shock (F41) | classical unemployment (J64) |
| Dominant supply shock (F41) | improvement in final goods terms of trade in the long run (F14) |
| Dominant transfer effect (F16) | deterioration in final goods terms of trade in the long run (F14) |
| Higher oil prices (Q31) | increased unemployment in the short run (J64) |