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Abstract:
Analysis of oil-price effects generally maintain the assumption that oil-importers can be treated as small economies, which allows oil-price changes to be treated as exogenously set by OPEC. Analyses of oil-price determination rely on the assumption that the demand for oil is a stable function, which implies that real income of oil importers is unaffected by oil-price changes. Our analysis treats oil prices and economic activity as jointly determined. The effects of exogenous oil-price changes are studied in a simple theoretical world model. Hotelling's analysis is generalized to allow for both oil-price feedback effects and stabilization policies.
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