Working Paper: CEPR ID: DP6700
Authors: Selim Elekdag; Rene Lalonde; Dirk Muir; Douglas Laxton; Paolo Pesenti
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
JEL Codes: E66; F32; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity growth in oil-importing regions (O49) | Increased demand for oil (Q31) |
| Increased demand for oil (Q31) | Rising oil prices (Q31) |
| Rising oil prices (Q31) | Negative impacts on the global economy (F69) |
| Negative impacts on the global economy (F69) | Reduced economic growth in oil-importing regions (F69) |
| Higher oil prices (Q31) | Increased production costs in oil-importing regions (F69) |
| Global increase in gasoline taxes (H29) | Lower oil prices (L71) |
| Lower oil prices (L71) | Enhanced productive capacity globally (O49) |