Working Paper: NBER ID: w0991
Authors: Lars E.O. Svensson
Abstract: The paper examines welfare effects and the trade balance response to changes in the world oil prices and interest rates for a small oil-importing economy. The trade balance is mainly seen as the difference between saving and investment, and these are derived from intertemporal optimization. It is shown that the welfare effects consist of static terms of trade effects, intertemporal terms of trade effects, and employment effects. The trade balance deteriorates for temporary oil price increases, whereas its response is ambiguous for permanent oil price increases. For a fall in the world interest rate, the trade balance deteriorates, if the economy is a net borrower.
Keywords: oil prices; trade balance; welfare effects
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temporary oil price increase (Q31) | decrease in saving (E21) |
| temporary oil price increase (Q31) | present trade balance deteriorates (F14) |
| expected future oil price increase (Q47) | present trade balance improves (F14) |
| expected future oil price increase (Q47) | increase in saving (D14) |
| expected future oil price increase (Q47) | decrease in investment (E22) |
| permanent oil price increase (Q31) | ambiguous effect on present trade balance (F69) |
| permanent oil price increase (Q31) | decrease in investment (E22) |
| decrease in world interest rate (E43) | present trade balance deteriorates (F14) |